CHAPTER 8
Outside Factors Wound Takihyo
The company netted about $100 million during the year of my success with the Stacy Ames brand. Our estimates reflected Takihyo’s recent growth from licensing agreements with Bobbie Brooks, other various start-up divisions, and a general increase in revenue for the following year. We predicted a tremendous increase in sales in early 1973, so we invested about $20 million more into manufacturing and wholesaling overhead. Accordingly, we increased our output for the year. We bought more fabrics and raw materials to provide for what we saw as a growth in demand.
After the oil crisis of 1973, Japanese consumer demand was crippled. Simultaneously, the costs of our material and production commitments continued to grow—a devastating combination of factors. Japanese citizens were no longer buying carpeting and high-fashion items; traditional wood flooring was more economical than our mats, and a woman would wear an old dress a few more times, as long as it was carefully washed. Consumers considered most new goods to be extraneous, luxury expenses. People were more concerned with stocking up on necessities like soap, toilet paper, bottled water, and canned foods. The price of petrol products, including gas and oil, spiked with the announcement of the OPEC embargo in 1973; oil quadrupled to $12 per barrel by 1974. Because Takihyo used petrol products for a number of our fashion lines—such as polyesters and polypropylene in our carpeting division—we ran into trouble when the price of the materials spiked. We could no longer afford to buy materials to manufacture and distribute products to meet lackluster public demand. Carrying loss was not an option for us, particularly because of how quickly fashion changes from one season to the next.
We incurred massive operating losses during that year. Many of our clients weren’t capable of receiving the goods we had previously contracted to provide for them. And because consumers were no longer buying, our wholesaling businesses suffered. Even if we were in contract with retailers, we couldn’t give them product they couldn’t sell. Not only would it be a poor marketing and public-relations decision on Takihyo’s part, but retailers would just return the inventory anyway. After spending time with Takihyo’s accounting department and directors, we calculated an approximate $40 million1 loss—t aking into account all warehousing fees and inventory losses. However, this was just the number we put on the books; we estimated an increase of revenue at three to four times the incurred loss before the oil crisis. Before the change in the political climate, our figures projected steady—and quite strong—company growth.
Whenever I discuss this moment in Takihyo’s history, people tend to ask me what I would have done differently. The answer to that question is simple: nothing. However rocky the political narrative had been since WWII, more happened to help the Japanese country and people than anything else. Although there were many horrifying atrocities of war, the Korean and Vietnamese conflicts brought sustained economic benefit to Japan. Without those wars, many companies—particularly heavy industry in Nagoya and other Japanese cities—would not have grown so quickly. Beginning with the Japanese surrender in 1945, the US and Allied forces have used Japan as a strategic military zone, including manufacturing everything from vehicles to communications devices. Although they were funded with US money for US use, this financial support also laid the infrastructure for Japan’s future. These circumstances allowed Japan to industrialize faster than any other country in history. It took a mere 60 years for the nation to begin to benefit from becoming a home base for multiple wars.2
The wars increased earnings and spending per capita in Japan as well. The economic boost not only offered good-paying employment to the masses but provided inroads for industry to develop. Japan enjoyed exponential economic growth with great momentum ahead of it. Before the oil crisis, I saw no reason why production would slow for our company. The oil crisis was entirely unpredictable and left us without any means of preemptive action. Nevertheless, the corporate, social, and political climate changed.
I have also been asked, “Why couldn’t you stop production and return materials as the retailers returned to you?” Simply put, it is essentially impossible to stop in the middle of production. Once the raw materials are purchased, they are sent directly to the textile mill, which then passes the fabrics along to the garment manufacturing plant. After the goods are made, they are sent to the distribution center—then off to retailers. This process is set into motion with the first step. Nothing can be recouped if garments are only half-completed.
I offer the following example to further clarify: half of the raw materials are finished textiles and ready for transportation for production, while the other half is still being processed; the first half is then distributed, putting the chain of production and distribution of the garment in motion. After completion, the first half is shipped to the distribution center to await the production of garments from the second half of finished materials to fulfill the order before mass distribution. Now, imagine that there were as many as seven or eight separate parts rather than two to manufacture one out of hundreds of garments.
What makes matters worse is the fact that inventory is not completely taken into account until it reaches the distribution center. Sometimes, there are delays in production; materials arrive late or only half an order is put to work at once. Output results are not always on a dime and can be either larger or smaller than expected. What further confused the accounting was that Takihyo did not manufacture everything it distributed, and did not distribute everything it manufactured. For example, we sometimes bought textiles to make garments because the manufacturing was different from what we could produce. We also wholesaled textiles and finished garments to other companies. The number of agreements we had for the amount of inventory we kept and sold needed a distribution center’s tracking. However, by the time the products were counted and numbered, it was already too late to avoid the macroeconomic conditions. There was no way for Takihyo to avoid this loss.
Despite the rate at which the red ate up Takihyo’s balance sheet, my only recourse was to step back and develop a managerial strategy to combat losses. I proposed that Takihyo’s convalescence—recovering from the impacts of the oil crisis, Nixon shocks, and the energy crisis of 1979—was a three-step process. First and foremost, we had to close all unprofitable divisions; second, clear leftover inventory; and last, establish new lines of credit with a bank to cover losses and to continue profitable operations.
I wanted to stop the bleeding quickly and efficiently. Excising burdensome divisions meant no payroll, inventory, and overall operating expenses to pay; it would give us the breathing room Takihyo needed. There is a saying in Japan: “If you are going to climb a mountain, you want to have the least amount of weight on your back.” Once the divisions were closed and we had a bridge loan in place, we could pay off debt and streamline to make Takihyo leaner and meaner.
I also wanted another way out if it turned out that we were in more trouble than we had initially thought. In retrospect, one of the most important lessons I have learned is that you need not one but two, three, four, or more ways to exit safely—for any venture. If all else fails, I always want there to be another plan to execute. This methodology provides multiple solutions for the complex problems of the future. Creating solutions before the problems arise is preemptive action; nothing else suffices. What many deem to be a sense of optimism, I see not as a confidence in execution but as comfort in risk-reward analysis. My worst-case scenario looked bright in the instance of Takihyo’s $40 million loss in the 1970s: I always had the option to sell Nagoya’s first high-rise building. The Marunouchi Building was not only built as an investment; selling it could be the key to escaping any possible future financial distress.
Because companies in Japan carry a social function closer to that of the Western concept of the family, I had an obligation to those in the closing divisions. It was my duty as the president and patriarch to look out for those who had so earnestly worked for the company, however long their tenure; this was especially true for those who were hired for a venture I started. They needed employment, but Takihyo could not afford to keep all of them—which was the case for most companies at the time. I had to call in favors from a number of friends in various industries. In the end, a combined effort from all levels of management helped us find placements for these individuals.
I also planned a potential revival for the closing divisions if and when the time was right. Because we had already invested time, energy, resources, and money into proper distribution channels and branding, the doors had already been opened for Takihyo to reintroduce that particular product to the market. In my view, closing a division opened doors for future business in the same field—especially since closing equates with the reallocation of current resources. This line of thinking, though, was all-expansive.
I sold any of the dead-weight inventory at whatever the market would take. Carrying inventory that won’t sell is like saving cracked eggs; it only results in putrid smells and a mess in the kitchen. Many of the other managers tried to convince me to save products for a rosier economic climate. They seemed to forget how much it costs per square meter to store $40 million worth of inventory. I calculated that the overhead far exceeded the margins of profit, provided that the world economy would bounce back in a couple of years. The arguments other directors and board members made held no relevance to the times for me. It seemed cleaner to rid the company of any malignancies and strive forward in hopes for a brighter future, while still expecting less. At the end of the year, we brought in approximately $80 million—but lost $40 million in inventory and associated costs.
Takihyo had reached a point where it couldn’t function without some kind of financial help. I needed to look outside the company. As I recounted earlier, I took a loan from a family-friend’s bank—then called The Tokai Bank, Ltd.—after my father died. I was now in a situation nearly as dire and had very few other places to look for help. I called Tokai again to ask for a loan to cover the company’s losses. Comparatively speaking, the size of our loan—$40 million—was the equivalent of $220 million in today’s dollars.3 In other words, it was a huge loan, and because we were a nearly 200-year-old company working with a publicly observed bank, media attention was inevitable.
The bank needed some time to figure things out and get back to me. Tokai offered me the help I needed, but on the condition that the bank would appoint an overseer to report on how Takihyo conducted business. Tokai understandably wanted an insurance policy against the massive loan. The financial trouble Takihyo faced seemed daunting from the outsider’s perspective. Taking such a large loan makes an uninformed spectator question management. The bank didn’t want to take any risks and I needed to convince them why Takihyo was not at risk.
Some people thought that I was driving the company—along with the $40 million—into the ground. The bank wanted some way to control any potential for loss and the bankruptcy protection that could ensue. They arranged someone from an Osaka branch who was about to retire to oversee the repayment of the loan to Tokai in Nagoya. I didn’t really have a choice; this individual would take an executive role at the company.
As I mentioned before, although there are no real unions in Japan, companies function as families. This makes it incredibly difficult to fire staff, especially those who have served their entire tenure at one company. In most cases, Japanese companies can only push people to retire or to quit. The individual that Tokai Bank sent was an old executive who probably should have been fired but couldn’t be, due to the Japanese corporate system and the bylaws protecting employees. This flaw in Japanese corporate structure led to a harried and slow recovery for Takihyo after we took the loan. It also put tremendous pressure on my personal life.
My friend from Tokai Bank called me to tell me that someone named Mr. Ito was coming into Takihyo as an executive vice president. I knew nothing about who he was or what his history had been other than his relationship with the bank. I was fully aware of the possibility that this individual could be a bad employee. I figured that it was temporary anyway and that it wouldn’t be too bad as long as he didn’t interfere too much. Unfortunately, he was more involved than I expected him to be.
When the loan became public knowledge, the story was printed in the papers. A number of friends and colleagues from Osaka called me to warn me about Mr. Ito’s character, but there was little I could do to reverse the decision at that point. Not only had the announcement been publicly made, Tokai had treated the situation as a fait accompli. I also knew that I couldn’t worry too much; at the end of the day, my plans for Takihyo were quite optimistic despite our recent financial problems.
But I started to see my plan deteriorate after Mr. Ito’s arrival, as he began reporting false information to the bank. I am unsure what his motive was in doing so; perhaps he wasn’t really paying attention to the business, or perhaps he was misinformed. In any case, his relationships, with me and with the company’s directors, were neither helpful nor productive.
Mr. Ito started talking to the media about elements of the business without my or anyone else’s consent; he only offered information that was to the detriment of the company. At that point, Takihyo started to look like it was going under, as far as the public was concerned—despite the fact that we truly did have the assets to support our losses. Mr. Ito’s refusal to dig deeper and give Takihyo an honest representation to the media—to whom he shouldn’t have been talking without the company’s consent anyway—and to Tokai Bank took nearly a decade to repair.
Making matters worse, the consequences of Mr. Ito’s actions and Takihyo’s subsequent, painfully slow rebound reverberated into my private life. My wife, the mother of my twin boys, saw only the press hounding us daily for news of the company’s imminent failure. She had been raised in the traditional Japanese style; the embarrassment and loss of honor that she felt we would both experience was too much for her to bear. In 1978, she took her own life. I mourned her loss in the traditional Buddhist fashion: I shaved my head, and I temporarily broke contacts with the outside world. However, I wouldn’t let Takihyo’s losses and Mr. Ito’s path of destruction destroy me too. My wife’s death traumatized me; however, I was confident that there was still much left in store.
Leave-taking
It is very difficult to write—or read—about death with any degree of clinical objectivity. When someone we love dies, all of the mechanisms of leave-taking come into play with intensity unparalleled by any other experience. There is a universal tendency for people to deny loss in response to such a tragedy. When a loved one dies, survivors often cannot believe that the death has occurred, thus impelling certain psychic mechanisms to operate as if indeed it had not taken place. This is sometimes referred to as magical thinking. Although a number of misguided doctors sedate people suffering from acute grief, many physicians and psychologists are now alert to the dangers in this tendency. They realize that mourning is a critical therapeutic process.
When Tomio Taki’s wife committed suicide, the world briefly stopped for the young, up-and-coming manager. He slowed down; for a short while, he disappeared. Tomio and I had met only a few years before at a number of Young Presidents’ Organization universities,4 and I met his wife Yoko as well; she was beautiful and reserved. A few months after her death, Tomio recounted to me that in the Buddhist tradition, he shaved his head in mourning for her. He took time from his duties and obligations as the leader of one of Japan’s largest textile and garment businesses to gather his thoughts and cope with her death. He also had two boys in their teens in great need of his support.
Mariners know that when a typhoon strikes, the greatest danger is that the ship will broach to—come broadside to the waves. When this happens, the vessel no longer answers to the helm. The wind and sea take command and the ship is in deadly peril of sinking or capsizing. To try to run before the storm is to increase the danger; the only hope is to heave to and ride it out. Heaving to means slowing down the boat’s forward motion to lessen the impact of the surrounding wake. Although huge waves wash over the decks and superstructure, the ship can survive. Somehow and in some way, Tomio understood that the best policy during the first moments of trauma was simply to ride it out. He distanced himself from the corporate world to heave to and let the waves break over himself. Such waves of pain were quite hard for him to handle, but instead of fleeing or self-medicating, Tomio confronted these pains by mourning.
A healthy psyche will repair the damaged or broken threads. The work of mourning is necessary to the process. But the mind needs emotional resiliency to do this. When we are constantly involved with other people and forced to think about other things, the work of mourning is deferred. Furthermore, our emotional resiliency—already low—is exhausted. The bereaved person who is distracted all day long will go through the work of mourning only in the late hours of night; F. Scott Fitzgerald’s “dark night of the soul, when it is always three o’clock in the morning.”
If Tomio had not taken the time on his own to suffer, mourn, and grieve for the loss of his wife, he would have never continued on his route to his successes in the mid-to-late 1980s. The 1970s brought Tomio his lowest of low periods, from the closing of many of Takihyo’s divisions to his wife’s suicide. However, the 1970s—as mentioned in the introduction to Part 2—were also a time of astronomical growth, a time during which Tomio planted the seeds for future growth far greater than anything previously anticipated. I believe this could be accomplished only because Tomio took the time to mourn.
Tomio gave himself time alone when he was hit by his wife’s suicide. From a professional standpoint, he couldn’t have reacted in a better way. He mourned; he let the process go forward. Sometimes people act as if there were a sliding scale of mourning: a year for the death of a husband or wife, 10 months for a parent, 8 months for a divorce, 6 months for a separation—down to 30 seconds for a pair of cuff links. But life doesn’t work that way. The loss that seems trivial according to conventional standards may hit us harder than what is assumed by others to be a major blow. In other words, we must all take the time to heal in times of need—whether it’s from a personal loss or a professional one—as Tomio did so appropriately.
Mortimer R. Feinberg, PhD
1 In 2010, the loss is the equivalent of $196,000,000.00 using the consumer price index as a benchmark. The CPI here is used because Takihyo caters to typical consumers and therefore the change in the cost of buying goods for most consumers offers the most accurate basis for difference in value over time. Statistics from “Measuring Worth” (www.measuringworth.com/index.html).
2 Although there are many texts to consult, perhaps the most exacting is John Dower’s Embracing Defeat: Japan in the Wake of World War II (New York: W.W. Norton & Co., 2000).
3 See footnote 1.
4 YPO terms the “university” as a place for young presidents to come together and learn with one another. These two- to three-day events are conferences.