Originally published in Nikkei Asia's “Henry Kravis: My Personal History"
Chapter 14
Carving out noncore units from Japanese companies resistant to change
After exploring and evaluating opportunities to expand our business into Asia, we eventually established a foothold in Tokyo, in 2006.
One of the first things George (Roberts, co-founder) and I discussed was that establishing ourselves in Japan would require significant patience and a long-term view. I had a feeling that it would take a longer time for us to build a presence in Japan than in China, India or Southeast Asia. I firmly believed that unless we were prepared to spend a decade before doing our first deal in Japan, we should not open our office.
My first trip to Japan was in 1978. I visited manufacturers and a steel supplier to one of our portfolio companies in the U.S. Thereafter, I traveled to Japan every year and quickly learned that doing business in Japan was not easy.
Shortly before we opened the Tokyo office, I was discussing investment opportunities with the CEO of a Japanese trading company when he told me something I would never forget. When I asked if KKR should invest in Japan, he said, "Absolutely, [but] make sure you invest in companies whose operations are all out of Japan."
Why should we do business in Japan if the business environment was so closed? The answer: Japan was the second largest economy in the world at that point, and it was imperative that we plant our flag in the country. Even if it would take time, I wanted to make sure that we would build a network of connections and be known and respected in Japan over time.
The attitude adopted by many Japanese companies back then was that of "We can't." George and I are quite the opposite. We have always been about "We can," and pushing to say, "The glass is half full. Let's fill up the rest of the glass and make the most out of it." But many of the top executives of the companies we met were quite resistant to change. That outlook has since evolved to some extent.
I will never forget the conversation when I once asked a Japanese CEO, "How many subsidiaries does your company have? And how many of them are core to your operations?" I asked this because some of these subsidiaries that many of the Japanese companies own could well be independent companies and potential investments for a firm like ours and we could help them (as independent companies) grow to be globally competitive enterprises.
He told me they had 2,000 subsidiaries, and all of them were core to their operations. I was not quite sure that was possible.
I would propose to Hitachi the 'buy-all-at-once' method that we had used in buying and restructuring seven subsidiaries from Germany's Siemens. At that time, Hitachi had more subsidiaries than most other Japanese companies. The response I received was, "Let us think about it." I read that as a polite rejection, delivered in a typical Japanese manner.
We entered Japan when the population was beginning to decline, which I was certain would have a shrinking effect on the economy. It was clear that Japanese companies needed capital and ideas from the outside, but many executives were held back by a cultural resistance to change.
To encourage a different mindset at KKR, I once gathered our entire Japanese team for a lunch meeting and suggested that they each make one call to a top executive such as a CEO or CFO once a week. "Don't ask them if they are for sale or anything; just start building a relationship," I said. I knew that it would not be a comfortable experience for most of them, but George and I have always believed that stepping out of one's comfort zone will help individuals grow both personally and professionally.
I expected that the calls might be cut off and would not get through to the individuals, but there might be someone who would connect them to the top. Of course, some were more successful than others. Eiji Yatagawa is one who took this on, and today he leads our private equity team in Japan as a partner.
In 2010, four years after we entered Japan, we made our first acquisition. We built on that momentum and have since invested more than $8 billion in the country, and today manage some $18 billion in assets under management.
Today, nearly 20 years since our entry, corporate governance in Japan is changing for the better.