Impact of cultural differences on acquiring Japanese enterprises

By Zhang Hefu, East & Concord Partners
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The year-on-year increase in the number of mainland tourists visiting Japan has seen more Chinese enterprises also set their investment sights on their neighbour to the east. While China’s regulations and administrative approvals are far more complex, Japan’s rules are minimal without any need for confounding legal processes. Still, corporate culture or unwritten commercial practices in the land of the rising sun have had a major impact on a foreign entity’s chances of a successful acquisition of a Japanese enterprise.

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Zhang Hefu
East & Concord Partners
Partner

According to media reports, there still exist in Japan more than 30,000 century-old shops. Due to issues like a rapidly aging society, owners of many of these old shops do not have potential successors, giving Chinese enterprises commercial opportunities for acquisitions. However, the number of cases where Chinese enterprises successfully acquire and operate Japanese enterprises can still be counted with the fingers on one hand. With more than 20 years of experience in dealing with Sino-Japanese enterprise legal matters, the writer of this article is sharing ideas on how to understand Japanese corporate culture.

Understanding internal inhibition character of Japanese. It is evident to the Chinese that Japanese people, be it their language or their emotion, are quite introverted. Not only do discussions with the Japanese require a lot of time and energy, it is also tough to figure out the other party’s real attitude. For example, in a certain proposal, the Japanese will often respond with something like “that sounds a bit difficult”. If we do not realize that, in Japanese, “a bit difficult is tantamount to impossible”, it could affect subsequent discussions.

Understanding Japanese philosophy of life of “not troubling others”. The Japanese are taught from childhood “not to cause trouble for others”, and this has gradually morphed into a philosophy of life for them. For example, when exchanging business cards at an initial business meeting, they will use both hands to turn the card to that the writing faces the interlocutor before giving it to him or her. If we can avoid “causing trouble” to the other party on the details in commercial negotiations, allowing the other to feel a sense of sincerity, communications between them will likely go much more smoothly.

Keeping one’s word vital for establishing business cooperation. Japanese enterprises, particularly small and medium-sized ones, attach more importance to one’s promise and trustworthiness than contracts or other such written documents in business dealings. Little things, such as like arriving late for an appointment, or failing to keep one’s word, will absolutely have an impact on a Japanese person’s trust.

Understanding Japanese enterprises’ no-rush decision-making process. It is often said that Chinese enterprises complain about the Japanese being too longwinded and wordy in commercial negotiations, something with which this writer agrees. However, it is unsurprising to discover that Japanese enterprises have a bottom to top, level by level, reporting system to ensure review and full input at each level, facilitating implementation after a decision is made. This is something that Chinese enterprises need to understand and accept in negotiations.

The Creat Group’s takeover of Honma Golf in February 2010 marks a successful purchase of a Japanese enterprise and a Chinese entity’s successful operation thereof post-acquisition. Established in 1959, Honma Golf is one of the oldest golf brands in the market. At the end of the 1990s, when the property bubble in Japan burst, Honma sank into a financial crisis, leaving it no option but bankruptcy and restructuring. In 2010, the Creat Group bought 80% of the equity of Honma Golf from a fund company for several 10s of millions of US dollars and bought the remaining equity the following year.

This acquisition saw Honma list in Hong Kong in 2016, before returning to the ranks of the world’s 10 largest golf brands and its golf club sales for that year give it top ranking. As counsel for the acquirer, this writer was involved in the entire acquisition process. After the legal, financial and operational due diligence, as the Chinese party of the acquirer in the project, we put forward three requirements different from other Chinese style acquisitions:

Taking an opportunity by the representatives of the Chinese party to meet with all Honma employees. During the due-diligence interviews, we learned about the worries of the enterprise’s employees, particularly their negative attitude towards, worries about and lack of trust in a Chinese enterprise holding the equity. The Honma brand has mostly been built on the handmade products of its craftsmen, and realising the significance of the presence of these existing employees, the Chinese party proposed to meet directly with them to show its strengths and future business policy, ultimately winning their trust.

To retain the Japanese employees, the Chinese shareholder did two things: (1) it allowed management personnel and production craftspeople at a certain level and above to retain their positions for a certain period of time, secured warranties from those people to the effect that they would continue working in their positions and expressly wrote this into the equity transfer contract; and (2) it introduced an employee shareholding plan to motivate staff.

Retained the pre-acquisition operating team and, even though the Chinese party held control, it maintained the Japanese style of operation. With a view to sticking to the existing operating method and, despite the fact that the Japanese party repeatedly requested a transfer of 100% of the equity, it was ultimately decided, after arduous negotiations, that the Japanese party would continue to hold a certain percentage of the equity for a certain period of time. What is admirable about Creat is that it did not appoint Chinese managers, but trusted the existing operating team, thereby tapping into their enthusiasm.

Practice shows that the success of Honma Golf provides Chinese enterprises with inspiration on how to operate a Japanese company post acquisition.

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China and Japan are neighbours, separated by a narrow strip of water, but the differences in their corporate cultures are much wider. Accordingly, when a Chinese enterprise acquires a Japanese entity, it needs to realize the importance of corporate culture and, in the course of preparations, needs to familiarize itself thoroughly with the Japanese enterprise’s history, culture and values and accord it the respect it deserves. Only in this way can the objective of the acquisition ultimately be realized.

Zhang Hefu is a partner at East & Concord Partners

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