Secrets of the orient

Family businesses in Japan face tough challenges that would sound familiar to their counterparts in America. To prosper in the nineties, they are updating a traditional concept that defines family obligations both to the company and to employees.

By Joel Kotkin

No one quite knows who came up with the formula. Somewhere along his family's multi-generational line of doctors, one of Yasuo Fuji's ancestors concocted an herbal formula that seemed almost miraculously to lessen the coughing and congestion associated with colds and flu.

For hundreds of years, the mixture was used only by the family and its retainers. They called the mixture ryukakusan, or "dragon horn powder," and like many Japanese concoctions, it was a mixture of many cultures, including traditional Chinese herbal medicine, Dutch cold remedies, and senega, a rare herb imported from North America.

Today, Yasuo Fujii uses the same old formula as the basis of one of Japan's most famous and successful family businesses. From a modem office not far from the family's ancestral home in Tokyo, he runs a flourishing $30 million company with some 100 employees. Ryukakusan, the traditional powder, is now also available in lozenges and liquids.

"Ryukakusan medicine is like Coca-Cola; it's the company name and the product," the 60-year-old Fujii explains. "We don't have a patent, but we're the only ones who know how to make it. It's a system: the sequence and technique. Some Chinese companies have tried to copy it, but it's a very fine thing, like scotch whiskey."

But the success of Ryukakusan Co. Ltd. — and the Fujii family — is far more than the ability to make a unique product. Like other Japanese family businesses, the Fujiis' fonnula for success includes a great deal of persistence, loyalty to the family, and a sense of obligation to employees and customers.

These attributes have helped the Fujii clan, and, indeed, family businesses throughout the country play a critical role in Japan's spectacular economic development. From the dawn of Japanese capitalism in the seventeenth century to today, these firms have spanned a broad spectrum from small suppliers to giant international trading companies.

The economic origins and strengths of Japan are supported by these kind of family businesses," notes Yasuo Nakanishi, a leading Japanese economist, and chief consultant for the Mitsui Research Institute, an affiliate of the Mitsui Taiyo Kobe Bank. "They are like the stones built up under a castle. They hold up our foundation."

The foundation, however, shows signs of severe strain and even cracking. Like family businesses in the United States, those in Japan face daunting tax problems as well as difficulty finding successors among a new generation that enjoys many more career opportunities than did their parents.

Japanese family companies are finding some answers to these problems by rediscovering a fundamental concept that has sustained their family business culture for centuries. In the notion of ie (pronounced ee-ai) may be some lessons for family companies in the United States as well.

The sense of continuity in a Japanese family business goes beyond maintaining the family bloodline. It focuses instead on the survival of the corporate ie, or house, into the next generation.

"You cannot overestimate the importance of ie," observes Hideto Ohtsubo, a professor at Fukuoka Technical College and a longtime observer of small Japanese companies. "It holds a special, almost spiritual significance for us."

Although usually tied to a family or don, the ie involves a broader concept of a corporate household, with attendant obligations to serve both society and employees by maintaining the appearance of family continuity rather than bloodlines. As John Pezel, a former anthropology professor at Harvard University, has noted, corporate assets in family owned companies are widely considered to be those of the ie, with the current family serving as "a trustee."

The notion, Pezel says, grows out of the common mythology of genetic homogeneity among Japanese. For them, he writes, "genetic legitimacy is racial or ethnic...and is assured by the myth that all Japanese are descended from the gods." He says "the mystique of the durable house" is more important than blood lines and must be preserved by any means necessary.

In Japanese family businesses, it is relatively rare to encounter the second- or third-generation owner who, although basically disinterested or incompetent, continues to run the family enterprise, often into the ground. Family connections simply aren't enough to assure a top position in a Japanese family company. Disinterest and incompetence threaten the survival of the corporate house and are simply not tolerated.

This commitment to the ie has helped the Fujii clan survive many wrenching changes from the Meiji Restoration to the dawn of the high-tech era. Family members and those brought into the clan managed time and again to adjust to the new realities while maintaining a strong attachment to the traditions that bound them together.

"I felt an obligation to my father and also," Yasuo Fujii says, pointing towards the heavens, "to the debt I owed the ancestors. It is my foundation for life, and I hope it will still be here, in the family, 50 years from now."

Family business owners almost all maintain that if a direct heir is missing, incompetent, or disinterested, they would rather steer management into the hands of an outsider, or even into the public markets. One traditional method of maintaining family control — used by the famous Mitsuis as early as the eighteenth century — has been to "adopt" a particularly valuable manager, or perhaps a cousin, into the main family. This adopted person may even assume, the surname of the family that owns the company.

Traditionally, if the Fujii family did not produce a qualified male heir, they would adopt one. In modern times, this has often meant the promotion of professional managers over ineffectual family members. But at the same time there is little interest in bringing in a hired gun to run the company since that could violate the spirit of the ie. Such outsiders in American business often try to boost profits by shedding the jobs of longtime employees; in a Japanese family business, this tactic would be considered unethical.

"It's a sort of spiritual obligation to the past and the people who work here," Fujii explains. "Of course I want my son to succeed, but if he did not want to or could not succeed me, someone would be found to join the family. The company would survive."

A deep sense of obligation, particularly towards employees, remains among the strongest motivations to those who start or inherit the reins of Japanese family owned businesses. Consider Chie Koizumi. She had no obligation to take over her husband Mineo's company when he fell ill in 1952. After all, his company, Osaka Rasenkan Kogyo Co. Ltd., had been founded by his grandfather in 1912 and had been left as little more than a bombed-out shell by American bombers.

Koizumi herself was a successful businessperson in her own right, minting yen at a popular bar in Osaka's lively Minami entertainment district. When her husband died in 1953, her eldest son, Kazuo, was only four. Lacking a clear successor, she felt compelled to take the helm, although she had limited experience in the company's main business, the manufacture of tubes for various industrial applications.

"To tell you the truth I could have done without it," she admits 38 years later. "I made a lot of money with the bar, and I didn't have so much experience in the other field."

Koizumi, who later sold the bar, faced many problems. In post-war Japan, capital was short, the infrastructure still creaky after the American flattening of the Osaka industrial district. Moreover, prejudice against women, particularly as heads of enterprises, was severe.

"It was very hard at the time, particularly as a woman," she recalls.''But I didn't have anyone to rely on. It was the family business generation to generation. There were a hundred people working, a hundred families who depended on the company. I felt responsibility."

Under Koizumi's direction, the firm expanded rapidly by supplying speciaized tubing for post-war Japan's burgeoning shipbuilding and electrical machinery industries. Later, the company focused on tubing for air conditioners, gas distribution, and other industries. By the late sixties, the company qualified for a 19 million-yen investment (about $150,000 at the current exchange rate) from the Osaka Small Business Investment Corporation, which nearly doubled the company's equity.

Chie Koizumi paid a heavy personal price for her dedication. Her son Kazuo was left virtually an orphan, in the hands of maids and his maternal grandmother. "She was very busy," Kazuo recalls. "Even when she came home, she did the bookkeeping. The only time we had dinner together was on Sundays."

But rather than inspire resentment, Chie's dedication to the company only strengthened Kazuo's loyalty. Starting work part-time as he took up economics studies at a local university, he played with the idea of becoming a jazz musician, but his sense of obligation brought him back to the company.

"Later on, he asked if he could join the company," says his mother. "I was pleased, but I didn't want to show it because I didn't want to push him. If he was lousy, I would have fired him in a minute. There's no place for that kind of thing in a business."

Luckily for Chie and for the company, Kazuo turned out to be anything but "lousy." In fact, the company needed a radical change in direction and a new management focus to survive. The oil shock of the mid-seventies almost ruined the company, which had become heavily dependent on the air-conditioning market. As electricity rates soared, air-conditioning sales plummeted, cutting Osaka Rasenkan's sales by nearly half. Nearly 200 of of the company's 300-person workforce were laid off.

Kazuo strained to develop new products and markets. He developed a strong connection with Osaka Gas Co., which gave the company a steady customer not only in Japan's second metropolis, but in the whole of western Japan. More recently, he has developed new tubing for specialized high-tech products. Today alr-conditioning tubes, once the core of the business, now account for only a small percentage of last year's roughly $24 million in sales.

Although Kazuo, now president, has effective day-to-day control of the company, he still ascribes to his mother's basic values about the importance of keeping the enterprise, with its 100 employees, at a manageable size. Going public or ramping up for rapid growth, he and his mother both agree, would only threaten the future of their now durable house.

"I don't want to go public. I want the company to stay small. It's kind of defensive, but I never want to lay off people again," Kazuo says. "My mother says you can always grow the company again, but you can't make it small."

In Japan, as elsewhere, the death of the founder or second-generation leader can kill a company. When Kazuaki Murao died, he left behind a company called Naniwa Seitei, recently renamed Namitei Co., which started out by manufacturing nails and provided a decent living for his wife and five children.

Images of his father, working late at night to fight off bankruptcy, dominated the thoughts of oldest son Masatsugu, then 42, as he and his siblings gathered after their father's cremation in 1984. Masatsugu was left with the responsibility of dealing with the company. Times were tough; a recession had sent the company's market for nuts, bolts, and iron wire plummeting. With their father gone, Masatsugu doubted his own ability to run the company and wondered if perhaps the four brothers should go off on their own, splitting the assets with their mother and sister.

"We could not have conflict or there would be nothing," he recalls. "My main goal was to defuse conflict. We decided to keep the company together, even if we had to change the business. I was pessimistic, but my brothers boosted me up."

They agreed the markets they were in could not grow to support them all. But if his father had not left a thriving marketplace for them, he had done his best to equip his successors with the tools to expand the business beyond his own legacy. "Father taught us to be flexible and change with times, Masatsugu recalls. "He always reminded us of that."

Kazuaki Murao had survived many drastic changes. A poor farmer's son, he had served in China during the Second World War. He had no industrial skills, but he was determined not to return to the poverty he had known as a child. Instead he and his younger brother Masaji bought some old machinery and started making nails in 1945.

At first, it seemed a good choice of fields as post-war Japan began rebuilding. But tough competitors and an economic slowdown at the end of the Korean War brought them close to bankruptcy; the company changed directions, moving into the production of zinc-plated iron and barbed wire. When this market began to decline, the company again refocused, this time making wire products for use in automobiles, electrical appliances, and construction equipment.

But by the early sixties even these markets were drying up, and the demand for change once again became great. By then, Masatsugu, an engineering student at nearby Kinki University, helped the company develop ever more precise and varied products. Yet when he graduated, Masatsugu seriously considered offers to work for some larger companies who offered him a future more glamorous than making wire in the gray, grim industrial suburbs of Osaka.

"But I always knew I would do this business. I am disciplined by my father who was a very strong figure," he says. In other business cultures, the brothers might have scattered to different careers or fought for control. But Masatsugu's dedication to the ie enabled the company to grow enough to accommodate the brothers. Mitsuaki, 42, manages the company's factory; Yoshinori, 39, runs sales; 32-year-old Kazuhiko serves as director of technology.

Together this family brain trust has remade Namitei Co. from a limited, low- tech company to a highly diversified, technology-intensive business, with sales last year in excess of $17 million. Although wire products remain the largest category of business, a growing market for the company is telecommunications, which accounts for nearly 30 percent of sales, with a goal of 50 percent within the next two years.

By upgrading the skills of the whole family, Masatsugu believes the company can reach ever higher levels of performance. At the same time, it has helped the company cope with the severe shortage of skilled and technical labor now crippling many other smaller firms in Japan.

"If we had to rely on outside people, we would be in trouble," Masatsugu admits. "We in the family must be involved — we have a strong consciousness that this is our company. We want to stay here for a long time."

Although he is optimistic about the immediate future, Masatsugu's expression becomes decidedly downcast about the long-term prospects for his family company. New attitudes common among the young generation — lack of loyalty to company, a weakening work ethic, a greater emphasis on leisure — would have destroyed Namitei Co. years earlier. In addition, as the technical demands imposed by the company's product line grow, even the most talented family will soon run out of brainpower, not to mention financial resources needed for high-tech equipment.

"It's not likely someone in the family will take over the business in the next generation. Maybe the next president will be one of my brothers, but after that I'm not sure it will stay with us," he explains. "You have to think that in this society today the family has a hard time to survive as an entity. When you look at new ventures, you are already forced to look at working with companies like Mitsubishi. You are forced more and more to look outside."

These worries are commonplace among family business owners in Japan. In many cases, notes Tomotaka Sakai, an accountant with Price Waterhouse in Tokyo specializing in family businesses, demographics also are working against many family companies, many of which were started during the immediate decade after the war. Today most of the founding generation are in their sixties, yet many either lack qualified successors, or their children, brought up in a more affluent era, don't want to continue in the family business. This phenomenon is particularly true in socially unprestigious fields such as distribution or traditional manufacturing. In 1988, according to research conducted by Mitsui Taiyo Kobe Bank Inc., nearly 30 percent of all manufacturing firms that closed in Japan did so for lack of a successor.

'"You can see there's a lack of successors all over for family business," says Mitsui's Nakanishi. "Often there are no children, or there is no son, or maybe the children are too young. And sometimes, there's simply no interest. Kids these days see there may be something else that's more exciting to do."

Many companies that are clearly family owned chafe today at the notion of being labeled a "family business." Many owners tend to stress the corporate goals as more important than advancing their children into the top ranks.

This trend has been bolstered by the rapid growth in firms selling their shares on Tokyo's over-the-counter exchange, which has roughly doubled since the early eighties to nearly 400 firms and could reach as high as 1,000 by the middle of the decade, according to the Securities Dealers Association of Japan. Even in today's sagging stock market, successful family firms such as Shima Seiki, a manufacturer of computer aided flat knitting machines and computer graphics systems with 1990 sales of $251 million, still insist they are looking to the public for expansion capital, rather than relying on family resources or debt.

Shima Seiki became a public company in December. Founder Masahiro Shima believes corporate expansion, and the benefits it would bring to his 1,000 employees, represents a far higher priority than maintaining Shima family control of the company."The family is not important because of the Shima name in Shima Seiki," explains Shima, who founded the company nearly 30 years ago.''There's no symbolic importance in this. I don't see a lot of enthusiasm or inspiration in this idea from my son right now."

In addition to human resource problems, Price Waterhouse's Sakai notes, the current inheritance tax system poses a mounting, and often more immediate, threat to their survival. Rates for businesses valued over $3 to $4 million can run as high as 70 percent. Even the most modest of companies often are subject to these high taxes; they carry real estate on their books that now, after the sharp runup in prices over the last decade, is worth tens of millions of dollars.

One critical sign may be the growth of corporate takeovers within Japan, which also have been accelerating even as Japanese acquisitions abroad have gained international notoriety. Since 1985, mergers among Japanese firms have risen nearly 30 percent, according to Yamaichi Securities. In many cases, note Nakanishi and other observers, the sellers were smaller and privately held family companies.

"A lot of family businesses are being forced to sell out just to pay the tax," notes Sakai. "Domestic mergers and acquisitions will explode because public companies will have the money to buy these firms and won't have to worry about the inheritance problem."

Even in the face of these mounting obstacles, it would be premature to write off the future importance of Japanese family business. Today's challenges no doubt will affect family owned corporations, but they are likely to find ways to survive well into the next century.

Although the adaptions will no doubt include concessions to modern methods and high technology, Yasuo Fujii still believes that the old values — the importance of maintaining the ie, family loyalty, and entrepreneurial flexibility — will preserve the proud tradition of Japan's family owned and operated companies.

Ryukakusan for instance, has survived despite the emergence of new competitors both at home and overseas, most particularly from the newly industrializing countries. The family tie almost broke as early as 1963, Fujii recalls, when at 33 he was promoted to chief executive of the company. Just graduating then with a Ph.D. in biochemistry from Osaka University, he thought Ryukakusan a rather stodgy old business, based on a traditional product of little scientific worth. Certainly, a life pushing the old remedy seemed hardly as appealing as a career in research.

Yet ultimately, that old concoction, whose effectiveness he doubted, turned out to be the company's greatest asset. "I tested it and tested it, but I found it was perfect," Fujii, a friendly and youthful looking man, says with a grin. "It simply could not be perfected."

Fujii chose to improve on the family formula. Besides extending the sales force and improving manufacturing of the original Ryukakusan product, he also added new lines including a joint venture with Mitsubishi Kasei, which markets diagnostic kits for both doctors and scientists. Last year, the joint venture's sales were almost $80 million.

Though Ryukakusan is now a much more exciting place to work, doubts arose in the late eighties about the intentions of Yasuo's only son, Ryuta. After all, he had chosen not to study pharmacy or medicine, concentrating instead on music. Yasuo even sent his son to study in Paris.

Yet, ultimately, the sense of ie did transcend generational lines. After a brief time considering a possible career as a concert musician, Ryuta has returned to work in the information and electronics products department at the company's joint venture with Mitsubishi Kasei. His period of youthful rebellion and questions seems at an end; he is clearly preparing to, once again, preserve the legacy of the Fujii clan and to take care of the company's employees, also part of the ie.

'"This is my destiny, and I believe a good result will come by my taking over this position," explains the 31-year-old, who now considers music "a hobby." "In comparison with big companies, an employer in family companies can consider and take parental care of his employees. By maintaining such an institution, the company's strength will be enhanced."

Joel Kotkin is coauthor of The Third Century: America's Resurgence in the Asian Era.

The surprising role of family businesses in Japan

FROM THE DAWN of Japanese capitalism, family owned firms have played a critical role in the island nation's economy. Indeed many of Japan's most well-known corporations can trace their origins to family owned companies. Some, like the Fujiis, trace their origins to the centuries before the Meiji Restoration of 1868, the event which is often seen as the watershed separating feudal from modern-day Japan.

It was back in the early seventeenth century that the Mitsui family, forsaking the honors of samurai status, began brewing soy sauce and sake, traditional Japanese rice wine. By the end of the century, the Mitsuis were engaged in everything from rice trading to finance and retailing.

The Mitsuis and a handful of other family companies emerged as huge business combinations known as zaibatsu, similar in power to such European concerns as the Rothschilds or the Krupps. By the time of the Second World War the four largest family controlled groupings — Mitsui, Sumitomo, Mitsubishi, and Yasuda — controlled as much as one-fourth of Japan's corporate assets and the vast majority of the nation's burgeoning overseas investment.

With the end of the war, occupation authorities were determined to break up the zaibatsu groupings, which they considered partly to blame for Japan's expansionism. Not only were many vast family holdings broken up, but the initiation of steep income and inheritance taxes worked against the accumulation of massive family fortunes. Most of the largest groups were reorganized as publicly traded companies controlled by professional managers.

Family owned companies continue to play a powerful role in Japanese business. They are represented in virtually every major industry. Among the most recognizable are Seiko, the world's largest watchmaker under the control of the Hattori family, and Suntory, Japan's premier brewing and spirits giant.

The far larger number of small family businesses together play perhaps a more important supporting role in the Japanese economy, believes Yasuo Nakanishi, chief consultant for the Mitsui Research Institute and a leading economist. Working often in family controlled units, firms with under 300 employees in 1986 accounted for over two-thirds of all industrial workers in Japan and 58 percent of all value added, according to current data.