Terrie's Take 962 - Baring To Buy Stake in Pioneer, But is it Too Late? e-biz news from Japan

Terrie's Take terrie at mailman.japaninc.com
Sun Sep 23 20:24:39 JST 2018

* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term 
technology and media entrepreneur living in Japan.

General Edition Sunday, Sep 23, 2018, Issue No. 962

- What's New -- Baring To Buy Stake in Pioneer, But is it Too Late?
- News -- What do earthquakes cost?
- Upcoming Events
- Corrections/Feedback - Space Elevator hints right in front of us
- Travel Picks -- Very English Morning Tea in Kumamoto, Super Potato in 
- News Credits

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+++ Baring To Buy Stake in Pioneer, But is it Too Late?

Last week the audio/car electronics manufacturer, Pioneer, announced 
that it was selling a large private placement to Baring Private Equity 
in Hong Kong. Although the deal won't be consummated until October, the 
placement will be for JPY60bn, and appears to give Baring control of the 
struggling firm. We have no doubt that the sale is being made on very 
favorable terms to Baring, because earlier this month Pioneer's share 
price collapsed after rumors that it might go bankrupt by missing a 
large bank loan repayment.

The Baring's Managing Director here in Tokyo is none other than Shane 
Predeek, who has been with the firm for 12 years. Predeek was previously 
with Ripplewood Holdings, where among other things he executed the 
buyout of Japan Telecom, a firm that eventually became Vodafone Japan 
then Softbank Mobile (now Softbank Corp.). A fluent Japanese speaker, 
Predeek was also the Chief Investment Officer of Joi Ito's Neotony 
company back in the 1990's - so he knows his way around.

And that's just as well, because in taking on responsibility for turning 
around Pioneer Japan, Mr. Predeek has his work cut out. Pioneer has been 
slowly sinking for over 15 years, after making some wrong calls about 
where the consumer electronics world was going. The management at the 
time, who have since fallen on their collective swords as penance, took 
Pioneer into the plasma TV business, and committed huge amounts of 
capital to the project. What they failed to see was the rapid rise in 
Chinese technical capability, coupled with the fact that LCD technology 
would turn out to be so much better than plasma in the long run. This 
wrong call was compounded after the Lehman Shock by more bets on 
hardware and a refusal to accept that Japan, by virtue of costs, 
management isolation (from international trends), and lack of engineers, 
would sink below the point of no return in the race to produce consumer 
electronic hardware.

To its credit, the company did recognize early on that it had 
opportunities in the B2B car electronics and mapping software sector, 
and it invested in creating a subsidiary mapping business called 
Increment P which surprised everyone by becoming a primary maps data 
vendor to Apple Japan back in 2011. The company has also recognized that 
while it can no longer compete in consumer electronics (and so for the 
last few years has been selling off slabs of that business to private 
equity firms), it might still be able to compete in core hardware 
components for new vehicle technologies, most notably 3D LiDAR systems 
for autonomous cars. The problem with this sector is that there are 
already many competitors who are much better funded and far less 
burdened (with debt and aged employees) than Pioneer.

[Article continues below...]

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[...Article continues]

Indeed, Predeek is on record as saying that what Baring finds 
interesting in Pioneer is its digital mapping expertise, stating, "We 
want to speed up the development and growth of the Asia mapping 
business." Then, even as Pioneer's 2018 Annual Report talks a brave 
story about the firm's 3D LiDAR and car electronics businesses (i.e., 
the ones that are losing marketshare and sucking up all the R&D cash), 
CEO Koichi Moriya says in a Nikkei interview  that subsidiary Increment 
P now represents the company's "future pillar." This is kind of 
disturbing, actually, because here you have the CEO indirectly saying 
that all the hardware stuff could be doomed.

And that is of course the problem. Pioneer, like so many big Japanese 
manufacturing firms, has found it exceedingly difficult to accept that 
the world has moved on and their future lies in intellectual property 
and software rather than in factories churning out hardware in 
competition to the Chinese. The question is whether Baring's JPY60bn is 
going to be enough to slough off the non-performing assets and refocus 
on the future, within the incredibly short space of five years. Our take 
is that given the size of the business negatives involved, neither 
JPY60bn nor five years will be enough - unless there is a secret deal 
between the parties to allow Baring to sell most of the business off to 
the Taiwanese. In that case, just as with Sharp, there will be enough 
people and depth of know-how on the Taiwanese side to quickly and 
efficiently rebalance the Pioneer assets between Japan and China/Taiwan. 
But then it won't be Pioneer's business any longer.

Let's say that Baring does manage to divest a bunch of the hardware 
businesses and significantly downsize the company. That leaves the 
mapping and LiDAR businesses, and perhaps a couple of car electronics 
operations. We wonder if the mapping business is really as good as the 
senior management seems to think? We say this because we have had direct 
interaction with the Increment P engineering team. They have some 
reasonably strategic thinking senior managers, who have been strong 
enough to do a deal with Apple and keep Apple as a customer for the last 
six years, even as Apple Maps was being trashed by Apple's own users 
(who instead would load Google Maps and use that). To be fair, Apple 
Maps has sucked primarily because of the interface it uses, but 
nonetheless, the inaccuracy of the Increment P data was infuriating and 
unforgivable to many users (including us), who would be sent to the 
wrong place by the app.

In fact, this bad marriage has gone on for so long, that, according to 
some sectoral insiders, Apple Japan is now generating its own map data. 
If true, this can't be good for Increment P or for Pioneer. 
Unfortunately we can't tell from Pioneer's Annual Report just how much 
money it is earning from fees from Apple, nor for that matter how much 
Increment P is contributing to its parent. So it's anyone's guess how 
losing Apple as a customer would affect the firm. We suppose it must be 
significant enough, though, that it's top of mindshare for both Baring 
and the Pioneer CEO.

Our own interaction with Increment P was rather negative. The subject 
was the syndication of Japan Travel location data (Japan Travel has over 
37,000 articles in 13 languages) to the mapping business, and a joint 
project to target inbound travelers with this data. However, as the 
talks moved from strategic managers to engineers, it quickly became 
clear that the Increment P engineers weren't interested in alliances 
with anyone else, and they ended up bluntly telling us that they could 
and would generate all this data themselves, along with a website that 
would be extremely popular with foreigners. None of this eventuated of 
course, and several years on those engineers are still mired in their 
algorithms and dreams of world domination - and now even Apple is 
drifting away from them. Hard-headed arrogance has its price.

So what Predeek's team have as a challenge isn't just moving the 
physical assets around. They will also have to deal with the core issue 
which is the engineers and a "not invented here" culture so endemic to 
Japanese firms. This is no different to the challenge that Carlos Ghosn 
faced when he took over Nissan, and where he had to remove most of the 
company's top managers, replacing them with more flexible junior staff. 
But it's not clear whether Pioneer has the size or depth to be able to 
follow the same process, and it may mean that Baring has to replace most 
of Pioneer's core team with outsiders. For that reason, we wonder if the 
purchase is really worth the effort?

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+++ NEWS

- Another Crypto Exchange Hack in Japan
- Naomi Osaka and the Nationality Act
- Hakuho - the awesome Mongolian Yokozuna topples records
- What do earthquakes cost?
- BOJ stimulus dwarfs other countries'

=> Another Crypto Exchange Hack in Japan

The FSA has come down like a ton of feathers (yes, no bricks yet) on one 
of Japan's 16 licensed crypto exchanges, Zaif, after the company (whose 
proper name is Tech Bureau Inc.) was hacked for JPY6.7bn of Bitcoin and 
other assets last week. Zaif was already on a short leash with the FSA 
because of its lackadaisical attitude to security and internal processes 
and it's just a shame that the FSA didn't move faster and harder after 
previous transgressions. It took Zaif engineers two whole days to 
realized they'd been hacked and robbed. The company now says that it 
will sell a chunk of its shares in order to raise the funds needed to 
reimburse the victims. ***Ed: Apparently in one earlier incident Zaif 
allowed users to buy Bitcoin for free, after a programming error. In our 
opinion, this should have prompted the FSA to suspend the exchange's 
license. Instead, they were allowed to drunkenly continue business, and 
even now they are allowed to continue operating... hard to believe. We 
think it's time the FSA switched to bricks.** (Source: TT commentary 
from cointelegraph.com, Sep 22, 2018)


=> Naomi Osaka and the Nationality Act

Good to see this story about the pragmatic attitude of Japan's 
Immigration Bureau about Japanese holding other nationalities. The 
subject arises because in two year's time 20-year old Naomi Osaka (the 
tennis player) will theoretically have to chose either Japanese or US 
citizenship. However, as the Japan Times points out, the Japanese 
Nationality Law is really a paper tiger, because no one out of the 
estimated 890,000 dual nationals has ever been charged for having 
another nationality. Specifically, the law carries no penalties or 
mechanisms to force people to choose a single nationality. ***Ed: This 
is of course good news for the increasing number of "hafu" kids who have 
one Japanese parent. If you're in an international marriage, the idea is 
to follow a simple mantra: register your newborn as a Japanese first, 
then the other nationality(s). That way the Japanese government has no 
record of the second or other nationalities.** (Source: TT commentary 
from japantimes.co.jp, Sep 19, 2018)


=> Hakuho - the awesome Mongolian Yokozuna topples records

Despite a series of nagging injuries recently, Yokozuna Hakuho has 
proven once again that he is a maestro among the mundane in Japanese 
sumo. In winning the Autumn grand tournament, he has now broken two 
all-time records: he is the first sumo wrestler to win 1,000 victories 
in the top division, and he is the first to have won 41 Emperor's cups. 
This time around he won 14-0, beating Ozeki Goeido. ***Ed: If there was 
ever proof that the Japanese need to allow more immigration, Hakuho is 
it. Almost single-handedly, his exciting style has saved the sport of 
sumo from irrelevance due to the poor performance of many of the local 
fighters.** (Source: TT commentary from mainichi.jp, Sep 22, 2018)


=> What do earthquakes cost?

If like us you ever wondered what each major earthquake costs the 
country when they occur (sometimes multiple times a year), you now have 
an answer thanks to a little article put out by Jiji Press. Apparently 
insurance payouts on non-commercial claims caused by the June Osaka 
earthquake (the one in Takatsuki, in between Osaka and Kyoto), reached 
JPY86.6bn as of Sept. 12, according to the General Insurance Association 
of Japan. This amount was surprisingly higher than the JPY78.3bn for the 
much more deadly Kobe earthquake in 1995, and is attributed to more 
people buying earthquake insurance. The highest payout on record was for 
the 2011 Tohoku earthquake, which cost insurers JPY1.279trn. (Source: TT 
commentary from the-japan-news.com, Sep 21, 2018)


=> BOJ stimulus dwarfs other countries'

While many central banks are watching the tightening moves by the US 
Fed, Bloomberg has a great article (excellent graphs) highlighting just 
how much bigger the Japanese effort has been and will continue to be. No 
wonder the Japanese stock market looks healthy, the Bank of Japan (BOJ) 
owns 75% of the total ETF market! In fact, the BOJ now owns JPY557trn 
worth of assets, more than the national GDP. At this rate, Bloomberg 
thinks that if the BOJ is successful in raising inflation to its target 
2% (no telling if that will ever happen, though), then the value erosion 
of the assets the bank holds may prompt a financial crisis all of its 
own. ***Ed: Interesting stuff, and a great argument for the BOJ to ease 
off slowly but surely, and forget about the inflation target. In all 
likelihood, Japan's inflation is more closely linked to wages growth of 
ordinary citizens than it is to the capital markets an trickle down 
anyway.** (Source: TT commentary from bloomberg.com, Sep 19, 2018)


NOTE: Broken links
Some online news sources remove their articles after just a few days of 
posting them, thus breaking our links -- we apologize for the inconvenience.



No upcoming events this week.


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=> In Terrie's Take 960 we ran an article on Japan's "space elevator" 
experiments. A reader points out that the early signs are that this is a 
serious and credible undertaking.

*** Reader comments: It seems like from the several stories I have read 
on the proposed "space elevator" that no one has picked up on the 
significance of the Sky Tree in Oshiage. While it seems unlikely that 
Sky Tree itself would be a suitable port for such a fantastic means to 
get into earth orbit, it at least is proof of concept that such a tall - 
and much taller - structure can be successfully built.

I suspect that for the truly enormous structure that would be needed, 
Tokyo would be not such a great spot for it due to the uncertain seismic 
activity here, and it might need to be in a better geographical location 
for earth rotation requirements, (though maybe a stationary "lift" 
satellite would not have a problem with WHERE it is locked into orbit).

The first several miles of the ground-based steel structure, with the 
rest being sort sort of super-strength cable, would likely be crucial 
and save a great deal in the total cost of the space elevator. Anyway, 
the point here is that Obayashi Corporation, the builder of the Sky 
Tree, is also  among those proposing the space elevator. I think that is 
certainly telling.



=> Walet Cottage Cafe, Kumamoto
Tea and scones with hand-made jam in a cottage garden

Hidden away on a narrow street, Walet is nestled among houses in the 
countryside, but you can not miss it thanks to all the people milling 
around this quaint cafe. On the day I visited, there was a small crowd 
outside even before it opened, chatting in the uncultivated yet pretty 
cottage garden outside, and waiting for the doors open at eleven 
o'clock. A tortoiseshell cat walked slowly towards to us which made me 
feel even more relaxed and peaceful.

When you are inside, give your name at the door and wait to be called 
when a table is ready. I ordered scones with hand-made jam which is also 
available as take-out as well. They were served on an antique plate 
which added to the bucolic atmosphere. The scone dough is neither too 
dry or bitter and is of a good size. Yes! I really enjoyed them with 
fresh cream and a jam which was not too sweet.


=> Super Potato in Akihabara
Flagship store for the retro video game chain

If you can whistle the theme songs to Super Mario Brothers and the 
Legend of Zelda without hesitation, Super Potato should be on your list 
of must-visit places in Tokyo. If you are rolling your eyes at your 
traveling partner's ability to whistle them, you might want to wait 
outside for this one.

While most stores only focus on what's new in the gaming world, Super 
Potato is a chain of retro video game stores in Japan filled to the brim 
with equipment and merchandise for games that you've long forgotten. 
Their shop in Tokyo serves as a kind of flagship store for the chain and 
includes a vintage video game arcade, leaving lovers of old school video 
games grinning from ear to ear.

Navigate Akihabara's maze of computer parts shops and evade all the 
girls in maid costumes, and you'll find Super Potato on the third, 
fourth, and fifth floors of a building painted in classic Mario decals. 
Don't be put off by the the somewhat sketchy back-hallway-back-stairway 
style entrance - just follow the sounds of the 8-bit video game cheesy 
keyboard music!



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Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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