The View From Over There John Hildeburn’s take on the Japanese economy.

We e-mailed Hasco’s John Hildeburn a few questions about the state of the Japanese economy in October (just after the U.S. dollar fell like a rock against most currencies), to find out what the mood is in Japan. What he sent back was so interesting that we decided to run nearly his entire message. We think it provides an excellent synopsis of the current Japanese economy and how it’s affecting the snowboarding industry. Hasco is the Japanese distributor for Sims. John is also involved with Morrow Japan; Morrow Snowboard’s Japanese distributor.

SNOWboarding Business: Opinion in the U.S. paints the new Japanese Prime Minister Kyzazo Obuchi as being very ineffective. Does the average Japanese citizen hold out much hope that the government will make the right steps to solve the current crisis?

John Hildeburn: Many in Japan and the United States were saying that Japan’s new prime minister, Obuchi-san, is a useless compromise; a faceless bureaucrat who will soon disappear and nothing will change. Basically nobody likes this guy. Then suddenly there seems to be real progress, and a bank bailout package emerges with cap figures larger than Australia’s entire GDP the total value of all goods and services produced in one year. Go figure.

Without getting into some big treatise on the Japanese government, it’s probably useful to have a little background. Japan is run by bureaucrats and the politicians just kind of rubber stamp. By bureaucrats I mean the guys-and they’re all guys-in the Ministry of Finance (MOF) or Ministry of Industry and Trade (MITI) and other such governmental organizations.

As in any country, there’s a system by which government and big business work together. Many times in Japan a shipbuilder is also a bank is also an insurance company is also a real-estate holding company is also a trading company. A conglomerate like that has a lot of influence in the government. Just as R.J. Reynolds may have a friend or two-or 44-in the U.S. Congress, so Mitsubishi has a few bureaucrats to look out for them in the Japanese parliament.

This is an incredibly gross oversimplification, but if we understand that many banks in Japan are “hooked” up with groups of big companies and the big companies are “hooked up” with the government, it makes it easier to understand how they could get into such deep doo-doo. Basically they all loaned each other piles and piles of money to buy real estate and build buildings. This worked okay as long as the economy was growing and real-estate prices were increasing.

Remember when Japanese were buying Rockefeller Center and Pebble Beach and pretty much the entire Hawaiian archipelago? Sean Connery was in Rising Sun and we were all freaking out that the United States was turning Japanese? Well that was just an aside to what they were doing in Japan.

But since 1989 real-estate prices have fallen by half (sometimes more). So all those loans are basically bad. They can’t and won’t be paid. And by the way it’s a great time to buy a condo in Kauai.

We used to have banking crises in this country every few years until the government started regulating as part of the New Deal. We had the S&L crisis in the 80s but the government bailed out or closed the bad banks. That was not really comparable to the monolithic, titanic f***-up the Japanese now find themselves in the midst of.

So, in your opinion how is the current economic/financial situation affecting the snowboarding industry?

When banks are in trouble it means everyone is in trouble. Businesses can’t get loans or they have to pay back the loans they have. Some banks are getting shut down, and bankruptcy rates in Japan are setting new records every month. It’s the worst situation since World War II, and it’s particularly severe for small businesses like specialty retailers.

Hasco, the outfit I work with, is in a relatively good position because they’ve been around a long time and our banks are stable. This is not the case for many of our competitors. But throughout the economy there are layoffs and business closures, and that means more people with less money to spend.

The remarkable thing is that Sims snowboard sales are actually increasing a bit. We lost some ground a couple years ago but that had less to do with the economy and everything to do with an industry-wide Japan feeding frenzy.

A lot of brands are toast in Japan now. Retailers facing iffy economic conditions don’t want to handle iffy brands. At the specialty level, the imported brands that are doing well are Burton, Salomon, Sims, and Forum. Other brands may still be visible, but they’re fading. A weaker yen has improved the situation for domestic brands like Mizuno, Yonex and Ogasaka (i.e. Rich Man).

But in general, less money to spend means less snowboards sold. The amazing thing is that snowboarding is still growing as a sport. Maybe people don’t buy a new board every year, but they’re still sliding in increasing numbers. With Sims we’re already sold out of several models. I think it has a lot to do with the fact that we’ve finally shut off the flow of boards into the gray market. In this sense, Sims is the cleanest brand this year. Even gray-market Burton boards are widely available. That changes the retailer’s attitude in a big hurry. If he doesn’t have to discount everything to compete with the gray market discount ski and badminton dealer across the street; he’s stoked.

When the yen was trading in the 145 to the dollar range a few months back, did that greatly affect snowboard shops and/or manufacturers in Japan?

The yen trading in the 145 to the dollar range wasn’t a few months ago, it was a few weeks ago. It looked like it would hit ¥150 and yes, it scared the snot out of us.

It helped the domestic manufacturers like Yonex, Ogasaka, Mizuno and hurt the importers like us. Basically it’s not good for shops and distributors who make a living out of hawking imported goods, because the retail prices have to go up.

Suddenly this week in October the dollar has fallen faster than me trying to huck a Michaelchuk. Biggest three-day swing in 27 years and the exchange rate now seems to be wavering around ¥115 to ¥120. This is apparently not so much a function of Japan getting better as it is an acknowledgment that the U.S. economy cannot continue to grow like it has.

This means people all over the world who have been throwing their money into the U.S. markets are beginning to get out. If you get out of a dollar investment, it means you’re selling dollars. More dollars for sale means cheaper dollars means stronger yen, relatively speaking.

If I had to guess I’d say the yen will settle around ¥125 to the dollar, but what do I know? If I were really smart, I’d be rich. Right? By the time your next issue comes out the exchange rate could be anywhere.

President Clinton says part of the solution to the Japanese financial problem includes a greater degree of deregulation of the economy and the opening of the national market. So, do snowboard manufacturers stand to ultimately gain by the current situation?

Yeah, and two weeks ago he said he didn’t have sex with Monica Lewinsky.

So, deregulate what? If the banks had been more effectively regulated, Japan wouldn’t be in this whole mess. Japanese economic deregulation and ending protectionism are things the United States has been demanding since Vin Scully started saying, “Get your hands on a Toyota,” right after his bit about Farmer John at every Dodger game.

Clinton has to say those things because it’s the capitalist creed. It’s like Reagan talking about the “Evil Empire” twenty years ago. Now the Evil Empire is gone. We have to bitch about something.

After World War II, the United States helped Japan set up a projectionist trade regime. The country had been destroyed by the U.S. Air Force and we didn’t want it to go Commie, so protectionism combined with credit were used to stimulate the rebuilding o
f domestic industry in the hope that it would create jobs and develop a modern market economy. I think we can say this strategy was somewhat successful-Japan has the second largest economy in the world now.

By the 70s, the Japanese should have started opening up. They’ll say they did and to some extent that’s true. In the long run, they have to change because to do otherwise is just stifling their own growth. Many say that failing to reform is why the whole program ran out of gas in 1989.

But it’s never that simple. Eliminating protectionism always requires burning someone. Usually that very same someone is busy stuffing the politicians’ or bureaucrats’ pockets with cashish. Right now is not the moment to expect the Japanese to de-protect or deregulate anything. They kind of have a lot going on with this bank thing. De-protecting also involves throwing people out of work and with unemployment at a postwar all-time high, it just ain’t gonna happen.

Anyway, in our little world it’s not that big of an issue. There’s no duty on snowboards. There is duty on outerwear-around thirteen percent-and yes, that’s to protect domestic manufacturers like Fenix, Descente, Mizuno, Itohchu-none of whom need any protection.

For the purposes of the snowboard business, the real question has to be: “Why is the snowboard industry hurting so bad?” Then we start getting into the real shit and, unfortunately it involves some hard, cold truths about some of your advertisers.

Declining economic conditions in Japan are a small part of the overall story. What I’ve learned the hard way is you can’t make any profit if you have an industry that insists on producing more than it can sell. This isn’t a complicated concept.

For example, if you build a snowboard factory to produce 200,000 or more boards a year-but only have orders for 60,000-you have a problem.

In trying to reach economies of scale you may make too many boards. If you do, they’ll inevitably be gray marketed (and not just to Japan) and your customers/distributors will bum. The value of your brand will erode, your business won’t grow, and your banker will not be stoked.