Japan's Most Durable Competitive Advantage

Japan. The word alone conjures connotations of deep-rooted cultural traditions of meticulous hard work and studious perseverance. We believe these traits, the very ethos of the Japanese, have directly contributed to the country’s high-quality products, superior manufacturing, and technological innovations. The result?  A durable global competitive advantage that translates into a compelling investment case for many Japanese companies.

Key Takeaways

• Japan’s long tradition of manufacturing excellence and quality craftsmanship has provided a significant and durable competitive advantage in both industrial and consumer goods.
• Japanese cultural norms of meticulousness and studiousness are also driving innovation in software and internet companies, with several Japanese firms poised to become global leaders.
• These competitive advantages may provide Japan a tailwind for the global challenges ahead.

Snapshot: A Cultural Tradition of Excellence and Quality 

Tokyo was perhaps the perfect setting for this year’s Summer Olympics to exemplify the qualities that Japan and its citizens embody. Had it not been for Japan’s perseverance, the 2020 Olympics may have been canceled rather than postponed, as the country managed to successfully host the games amid the pandemic. Japan’s athletes even set new national records for Olympic medal counts in every category.

We see that the very essence of the Japanese people is tied to a cultural tradition and history devoted to meticulous hard work, studiousness, precision, innovation, perseverance, and an intense focus on quality. 

The trajectory of many Japanese companies points to these cultural strengths. Toyota is a perfect, well-known example. Initially dismissed by Detroit as a mere copycat, over time Toyota has set a global standard for automotive quality. In addition to industrial companies, we see this Japanese tradition woven through many less-obvious segments, such as consumer goods, personal care, and healthcare, where products exhibit these same high standards of craftsmanship, excellence, precision, and quality.

Japan is a Global Leader in Advanced Manufacturing 

Manufacturing is not glamorous. It is a very laborious and linear business and requires hard work and perseverance to achieve superior performance, qualities which select Japanese companies abundantly display. Manufacturing excellence and innovation are apparent at many of Japan’s leading industrial companies, including: 

•    Nidec: the largest comprehensive precision motor manufacturer in the world, well positioned to benefit from an increase in electronic vehicles

•    Shimano Inc.: the world-renowned manufacturer of best-in-class bicycle parts with 70% global market share

•    Daikin Industries Ltd.: recognized as one of the world’s 100 most innovative organizations, its Air Intelligence offers new technologies that raise the bar for the HVAC industry

Japan’s manufacturing excellence extends beyond industrial goods. Take Fast Retailing Co, Ltd., the operator of UNIQLO brand clothing stores. With roots in advanced textile manufacturing, the company’s success is derived from its development of ultra-lightweight heat and dry wick materials. Today, it is the world’s third-largest manufacturer and retailer of private-label apparel, boasting 1,000 stores around the world.

Similarly, Unicharm has become a global leader in personal care and hygiene products, from baby diapers to products for the elderly. Japanese perseverance has led to the company’s development of innovative, high quality, breathable, and lightweight materials. 

Within the healthcare industry, Terumo Corporation, which was founded in 1921 as Red Line Thermometer Corporation, produced the first Japanese-made thermometer available for sale. It has grown has become Japan’s largest medical device manufacturer through the development of innovative, best-in-class cardiac and vascular products.

Japanese Tech Companies Poised for Global Growth 

Japan’s innovation and work ethic are increasingly evident with the emergence of leading-edge software and internet technology. For example, Japanese researchers at the National Institute of Information and Communications Technology just crushed the world record for the fastest internet speed, nearly twice as fast as the previous record.  

We have observed Japan’s software and internet development firms pay scrupulous attention to the most minuscule details in apps, algorithms, and interfaces, leading to excellence and innovation in functionality and design. Some of these brands are household names in the U.S., though their Japanese origin is not always widely known. Consider Recruit Holdings Co., Ltd., the HR technology and media company that owns Indeed.com, the #1 job site in the world, or Mercari Marketplace, which became widely known to U.S. consumers with its recent Super Bowl advertisement. Mercari operates an online marketplace similar to eBay and is notable for its smartphone functionality and superior user interface. Sony, one of Japan’s oldest tech giants, has followed a transformative path into the entertainment business, and its “PlayStation” has given the company a valuable global franchise.  

An Opportunity to Benefit 

Japan’s culture and tradition of quality and excellence in manufacturing provide Japanese firms with a significant and durable competitive advantage, creating a compelling investment case for select Japanese brands. And we believe this should provide a significant tailwind going forward. At the same time, this very uniqueness and complexity of Japanese business culture point to the advantage of utilizing portfolio managers who intimately understand these nuances in order for investors to fully capture the opportunity. 

The Hennessy Japan Fund, sub-advised by Tokyo-based SPARX Asset Management Co., Ltd., maintains a concentrated portfolio of globally oriented Japanese companies that exhibit this meaningful competitive advantage. Over the past few years, the portfolio has increasingly included innovative, asset-light technology companies that embrace this theme.

Portfolio companies have exhibited remarkable long-term growth rates, high returns on capital, and superior returns on equity when compared to Japanese indexes of all companies. These companies generally have strong “moats” and positive long-term economic characteristics, including network effects and economies of scale. 

We believe the Hennessy Japan Fund offers investors an opportunity to benefit from this meaningful and durable competitive advantage.