Change is afoot in Japan, says Dean Cashman, portfolio manager with Eastspring Investments.
‘Something is changing in the thinking of the Japanese companies we see. We’ve observed changes in business models, the focus on reducing capital expenditure and running asset light businesses and in some cases this change is accelerating, not slowing,’ said the Citywire AA-rated Cashman.
The change began years ago, says Cashman, although it has only recently been factored into prices of Japanese companies.
‘Ultimately, what drives this change is survival and good companies have been doing so for some years now. For corporate Japan, the financial crisis made it a pretty awful place to be because the yen strengthened as the global economy was slowing and those that were restructuring accelerated their process of attacking costs,’ he said.
While in previous cycles, Japanese companies may have relaxed their pace of reform once the pressure came off, this time a weakened yen has seen a faster pace of reform.
‘They’ve understood it’s not enough to be profitable, you have to be globally competitive and make a high enough rate of return to compete with other Asian and American competitors.’
Bringing back Sony
Sony is a key example of the restructuring that’s taking place said Cashman.
‘The company has restructured over the past year, focusing much more on their core businesses and they’ve begun to regain some ground in brand surveys,’ he noted.
Another area where Sony has focused on is bringing down cost structures, becoming capital light business with greater focus on R&D instead of manufacturing.
‘They’ve been quite aggressive in closing down weaker TV business capabilities, while being more R&D focussed and leveraging off their software and entertainment businesses. Cutting the losses in the TV business has helped the capital intensity of the business decline significantly,’ he added.
According to Cashman, markets have yet to factor in the changes taking place in Sony, as valuations remain cheap in historical terms.
Since the start of 2013 to end-September 2013, Eastspring Investments-Japan Dynamic A has returned 29.61% against the benchmark MSCI Japan NR return of 24.31% in USD terms.