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Written in the birth rate

29 Jul 2015 By Edward Hadas

Why did Nikkei buy the Financial Times? As my colleague Rob Cox points out, the best explanation is demographic. Thanks to minimal immigration and a small number of children, the population of the Japanese group’s home market is shrinking by about 30 percent each generation. Many companies that want to grow – as shareholders and managers generally expect big firms to do – have to look abroad for expansion.

Japanese managers may prefer not to talk about their otherwise inevitable decline. It is more pleasant to talk about global opportunities. However, the numbers are stark, and not just in Japan. The combination of low birth rates and economic maturity threaten the conventional strategies of many companies in all developed markets.

When the number of customers is hardly increasing and the total national wealth is growing slowly, analysts and the bosses who expect revenue to increase at a much faster pace than nominal GDP are likely to be disappointed. Company quality and business prospects are both what statisticians call normal distributions – most of them are close to average.

They will grow a bit less fast than the whole economy grows, which is to say, slowly. For rich and ageing countries, the real GDP growth rate is likely to be no more than 2 percent a year, and most of that growth will come from the likes of Google and Facebook, which provide totally new goods and services.

For the rest, prospects are mediocre at best. Decline is the natural destiny of most purely Japanese companies, in products ranging from soap to nuts, from electricity generation to clothing. Western Europe has similar birth rates to Japan but more immigrants, so the normal corporate fate there is stagnation rather than decline. American companies benefit from a higher birth rate and some immigration, so they can expect slow growth.

Under the dull demographic circumstances, international expansion is tempting. Nikkei is a latecomer. Many big Japanese groups already have significant operations abroad, as do their peers in other developed countries. Such investments sometimes work well, when superior foreign intruders can take share from sleepy domestic rivals. Japanese carmakers grew with that strategy, as did American fast food restaurants and European makers of precision machines.

However, choosing where to expand has got harder. Rich countries have become more difficult to win over, as markets have become more global. Nikkei could not hope to build up a rival to the Financial Times, nor could Japanese distiller Suntory hope to enter the bourbon market to take on Jim Beam. Both Japanese companies decided to buy the established foreign players at relatively high prices.

Those purchases might work, but the strategy of paying full prices for mature companies in mature markets is fundamentally flawed. The new foreign owners rarely have any operational or financial magic which crosses borders. They will most likely just capture the sluggish growth of the acquired companies.

Poor countries used to be a better place for established global leaders to find growth. But what are now known optimistically as emerging economies seem to be producing fairly sophisticated domestic champions at a fairly early stage of development. General Motors plans to expand massively in emerging markets, but it will work with a Chinese partner.

Combine stronger competition with persistent economic nationalism, and the path through emerging markets is rocky for many companies from developed economies. At the end, there is rarely an Emerald City of huge profits. As any international mining executive will explain with some bitterness, successful investment these days usually requires a big commitment, local contacts and often a willingness to share profits with foreign governments and companies.

It’s right that rich-world companies should find it hard to buy poor-country peers cheaply. The wealthy should help the less well-off, not take advantage of their ignorance or incompetence. In a more generous world, mature companies would be delighted to sacrifice profit for the sake of development. As it stands, though, if shareholders and managers are honest in their analysis, they might often decide the effort is not justified by the likely rewards.

In sum, relatively few mature enterprises in rich countries can hope to escape the global trends – little or no growth at home or in similar lands, and a big struggle to capture profit from growth in more promising economies. Mergers can add to operating efficiency, and creative accounting, for example share buybacks, can add artificial lustre to the historic record. However, the demographic and economic forces are ineluctable.

Many shareholders and managers would prefer to ignore or deny this hard reality. That is ultimately wasteful. Expensive acquisitions and ambitious growth-seeking investments are often a waste of time and money. For Nikkei and its ilk, the best way forward might be to accept a much duller destiny.


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