Do aging SME owners face the end of their business?

Japan’s declining birthrate is, arguably, the most critical threat facing the nation. The population will inevitably and irreversibly decline over the coming decades, with some estimates suggesting that, by 2060, there may be a mere 90 million Japanese.

Regardless, the impact of an aging workforce is already being felt across domestic industries, and small and medium-sized enterprises (SMEs), which make up an inordinate 99.7 percent of all businesses in Japan, are among those most at risk of disruption or—in a worst-case scenario—collapse brought on by this demographic time bomb.

Some 941,000 children were born in Japan last year, the lowest figure since nationwide records were first collated in 1899. Government data released on April 1 showed that there are 15.53 million children under the age of 15, down 170,000 from the previous year, now the lowest figure on record. The Japanese population peaked in 2010 at 128.01 million, according to government statistics, and had already contracted by around 1.34 million by 2017.

LEADER LOSS

Very soon, this falling birthrate is going to translate into fewer young workers joining companies. This will certainly impact the SMEs that form the backbone of the national economy, and the problem will be compounded by the retirement of an increasing number of SME owners, many of whom are the men and women responsible for the Japanese “economic miracle” in the aftermath of World War II.

“SMEs play a most important role in the Japanese economy, but a declining population is going to have a serious impact on this sector,” said Annie Chang, president of Tokyo-based recruitment specialist AC Global Solutions Ltd. and a vice-chair of the American Chamber of Commerce in Japan (ACCJ) Independent Business Committee.

“Company owners are facing the difficulty of succession planning, since their children are often not interested in taking over the business,” she told The ACCJ Journal. “This makes hiring talented people the biggest challenge they face.”

Steven Bleistein, founder and CEO of market strategy consultant Relansa Inc., is in complete agreement with that assessment and points out just some of the choices—and potential pitfalls—of the options they face.

“For tightly-held family-owned businesses, the biggest issue by far is leadership succession,” he said. “The owners often face the dilemma of passing the reins on to next-generation members of their family, promoting an employee to CEO or otherwise hiring a CEO.

“If a family member is the first choice, are there candidates who are qualified and also have the desire to run the business?” asks Bleistein, who is also a co-chair of the ACCJ Independent Business Committee.

“Are they not ready, and do they need time for formation, forcing the current leader to postpone retirement? Can the family owners entrust the family’s patrimony to a salaried CEO whose skin in the game can never compare to that of the owners?” he adds. “Do you have enough qualified family members to serve on the board to hold a salaried management accountable?”

FIVE-YEAR MISSION

In July 2017, the Ministry of Economy, Trade and Industry (METI) Small and Medium Enterprise Agency released a five-year plan for business succession. In the plan, it pointed out that the average age of an SME owner had risen from 47 years in 1995 to 66 years in 2015. It was also noted that, of the 300,000 SME owners interviewed by the agency who would be turning 70 between 2015 and 2020, fully 60 percent said they had not been able to identify a successor.

And the agency warned that as business owners continued to age, the performance of their companies would likely stagnate.

In an even more alarming assessment of the situation, the Nikkei business daily reported in October 2017 that, within 10 years, about 2.45 million SME presidents will be aged 70 or older, and 1.27 million of them do not have successors.

By 2025, roughly 6.5 million jobs will have been lost, and the GDP of Japan—about ¥22 trillion or $197.47 billion—may have been lost, the plan concluded. “Business succession issues are very urgent for the Japanese economy.”

Mary Nishikawa, a specialist medical writer who founded Lexaly Communications and is a co-chair of the ACCJ Inde­pendent Business Committee, points out that the impact of aging business owners is already becoming apparent.

“Small family-owned factories emerged in the 1950s after the US Occupation and boomed with the growth of manufacturing. Many of these family owners are now elderly, and those who would take over the business might not want to manage companies classified as being in the ‘three Ks’—kitanai, kiken, and kitsui.” These terms translate to dirty, demanding, and dangerous.

“Japan is already losing out to China and India,” she said. “If multinationals move factories abroad, those factories will also source locally. These small factories in Japan are closing down because the companies they have historically supplied are no longer manufacturing in Japan, as their owners are moving away. The United States experienced this some years ago, although it is now trying to persuade those manufacturers to return.”

In its 2017 five-year plan, METI’s SME agency spelled out the importance of ensuring business succession and provided some advice on how to “proactively embark on management innovations and other challenging initiatives, e.g., shifting the existing business style into a more venture-business style through business succession.”

HELPING HAND

Stating that it would “intensively support SMEs in their business succession” and “dramatically fortify support frame­works and measures” for owners and organizations alike, the agency’s first step is to set up a platform for SME owners and support organizations to connect and provide support, such as providing advice.

Secondly, the agency intends to develop an environment “that motivates the next gener­ations to succeed in business” by extending support to those who take over a business. In addition, the existing Business Succession Support Center would be strengthened and enhance collaboration with the private sector to encourage small-scale mergers and acquisitions between SMEs.

Steps are also being implemented to help businesses halt operations or carry out mergers, with the agency offering assistance to facilitate such changes, as well as helping SME owners identify and secure successors to a business or advisors to a new management team.

Underlining just how important it is that the authorities get SME succession right, Nozomu Takaoka, managing director for international relations with the government-backed SME Support, Japan, said in an interview with national broadcaster NHK that small companies here are facing a “critical” situation.

“If you do not use IT and you are not internationalized, then your future is doomed because of the aging and shrinking population,” he said, adding that, in the past year alone, some 30,000 SMEs across the country closed down.

“Maybe we have too many memories of success in the 20th century,” he said. “At that time, Japan’s industrial manufacturing productivity was among the highest in the world. But the problem was that IT investment was not adequate after the turn of the century, because the Japanese economy was doing okay, so [companies thought] why take a risk and start new things?

“You do not have to take a big risk, but, if you take a small risk and the government is helping, then you can see some improve­ment and you can expand,” he said, suggesting that one small change would be to encourage young people working in a factory to “freely exchange views and express their opinions” on how the company might improve.

WHO LEADS?

While Bleistein says he has seen no signs of resistance to ideas at least being considered, he told The ACCJ Journal, “I don’t believe this is an area where government can take the lead. I have never known any business owner or leader to go to the Japanese government in a first instance for advice and support.” he said.

“Leaders of small businesses are much more aware, savvy, and in possession of a higher degree of acumen than METI’s report credits them with. Lack of awareness and savvy is rarely the cause of a delay in succession; the cause is more often that a business owner simply does not like the options he or she has.”

Thomas Shockley, who also co-chairs the ACCJ Indepen­dent Business Committee and is president and CEO of travel document processing solution provider DocuMonde Inc., is also more positive about the outlook for Japan’s SMEs. He pointed out that similar transitions have been going on for a century or more and that businesses have evolved into new areas in the modern-day economy.

“As older legacy companies dissolve, new companies coming up are more likely than not unsuitable for venture capital funding, but will be employers of three, five, or 50 people.”

While this sector of employment was, in previous years, the truism of the manufacturing sector, it is now increasingly true within the software sector, for example. As Shockley points out, the software sector requires far fewer employees than industrialization manufacturing. Ford had 202,000 staff and reported an annual gross profit of $4.19 billion in 2017, while Facebook had 20,700 employees and reported a whopping $35.2 billion in profits for the same period.

Equally, Twitter has made about 1,600 millionaires. The top recent Japan IPOs have not created 50 between them.

“Japan needs an ‘angel bank’—experienced individuals with truckloads of cash derived from their cashed-in stock options such as in the United States,” Shockley said.

“The point I am making is that Japan may actually be in a very good position with a smaller population going forward, whereas the United States—with its growing population—may have too many workers in the sub-middle to lower sector of the economy. This will likely create significant social issues down the road for the United States.”

Custom Media publishes The ACCJ Journal for the American Chamber of Commerce in Japan.

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