00:00At the Sun Conference, of course, the broader macro environment at the moment is so interesting and so dislocated in
00:05a lot of ways, right?
00:07We've got the ongoing conflict in the Middle East, oil prices, that's also now driven the surge in yields amidst
00:13these fears of broader inflation.
00:15And that's not to mention the sort of fundamental dislocations that we might continue to see from AI too, right?
00:21How is all of this potentially informing, I guess, the prism through which you make some of these strategic decisions?
00:28It makes for a complicated world. Thanks for having me, Heidi.
00:33There's a constant competition for capital.
00:34We've got to continually think about the rising bond yields, for that matter, and how companies have to perform a
00:39lot better than they used to.
00:41Certainly, they're used to in a deflationary environment.
00:43And then we have the world of energy imported, as Japan is.
00:48And we need to think about companies that are thinking for that risk and kind of planning for that forward.
00:53So we'll continue to engage with companies that I think have incredible opportunities.
00:57companies that are incredibly cheap to their potential.
01:02And so that competition of capital means that the upside needs to be even better.
01:08Does the downside get a little bit more interesting too, right?
01:11Because we were just talking about the case when it comes to Japan.
01:13If you've got the 10-year pushing 3% levels we haven't seen in about three decades,
01:18when do you start seeing that feed through to the vulnerabilities of companies that are going to be exposed by
01:24high borrowing costs?
01:25Is that a theme that kind of matters to you at this point?
01:29Actually, it becomes a lot less of a theme for borrowing costs.
01:31And invariably, an enormous amount of companies still have net cash.
01:34Enormous amount of companies have a very little amount of leverage.
01:37So leverage, I think, is not primarily the issue.
01:40The issue is clearly in terms of discounting the future cash flows.
01:43In terms of businesses in particular with really low RICs and really low ROEs.
01:49And so businesses are actually working well below the cost of capital.
01:53As their cost of capital is go up, management needs to up their game to be well ahead of that
01:58cost of capital.
01:59And most important, and kind of the issue that I'm focusing on,
02:02is that boards need to hold management accountable if they're not achieving higher than the cost of capital.
02:06So, let's talk a little bit about some of your specific campaigns here in Japan.
02:15Because, of course, you know that we have seen those quality issues, bookkeeping issues with NIDEC, for example.
02:21When it comes to NIDEC specifically, have you seen some of those changes that you want to see?
02:25How satisfied are you?
02:28Actually, I'm very satisfied with their new plan.
02:31Next challenge is to see them execute on that plan.
02:33So, they're going to go ahead and revisit 40% of their businesses.
02:36That's great.
02:37Want them to go ahead and get out of their e-AXO business in China.
02:40Great.
02:40They're going to go ahead and look at a lot of other low return, low ROE businesses.
02:44Great.
02:45Let's see them.
02:46Let's leave Kushida-san.
02:47Go ahead and execute on that.
02:48And also, importantly, let's go ahead and see them resolve the most recent investigation and hopefully get a clean audit.
02:57How confident are you about their underlying business strength?
03:03Oh, I'm very confident of the underlying business strength.
03:06They make incredibly important products.
03:07It's used an enormous amount of machinery parts and machinery parts all over the world.
03:14They have a very robust business.
03:16Albeit this culture that existed on the Nagamori sign clearly has to change.
03:21They have to go ahead and, in my opinion, hold Nagamori sign responsible for it.
03:25The independent report did hold them responsible.
03:27There's a responsibility committee that's going to continue looking at whether there's legal angles as well against Nagamori-san.
03:34We're looking forward to that culture change being replete across the company.
03:37So this was actually a, you know, what we have not typically seen in Japan is actually a typical financial
03:44fraud.
03:44And this is not my words, this is the words of the independent committee, that they just were going ahead
03:50and systematically, well, fraudulently reporting higher numbers or often higher numbers, like 10 to 20 percent higher in operating profits
03:58than they historically had, than they really were, by misbooking expenses as CapEx and then systematically writing down that CapEx
04:05in the future, you know, at periods in the future.
04:08And so that issue was systematic.
04:12This issue was going on for a long period of time.
04:15Most likely, the company was paying the taxes they didn't necessarily own.
04:18Most likely, they would have taken much more proactive action.
04:21And when it did, finally, they didn't get a clean audit, they took proactive action.
04:26And we're really glad there's a cleanup of, you know, that culture.
04:29We hope that we can see a complete cleanup of that culture because the products are extraordinary and necessary.
04:34It's a great company for Japan, and we hope to see it has much better days.
04:41Seth, when it comes to Japan, we're also seeing, I guess, not only Japan, countries around the world, national security
04:49become a priority.
04:51We have seen, of course, the government stop MBK partners from purchasing Makino Millings, for example.
04:57Does that give you some pause on the progress and changes that we're seeing in the Japanese business environment when
05:06it comes to foreign investments?
05:09No.
05:10I mean, in terms of, you know, we, I should say, and actually, I think the far majority of investors
05:15are looking for strong Japanese companies to remain Japanese, produce higher returns.
05:19We're not talking about, like in Makino Milling and MBK in terms of companies being barred from buying companies.
05:26Invariably, we're talking and looking at companies that have fantastic Japanese IP to go ahead and monetize IP better.
05:32We're talking about NIDEC.
05:34Let's go ahead and actually go, let's go ahead and execute and fixing the culture and going ahead and, yes,
05:40reporting accurate numbers and getting re-indexed and re-indexed.
05:44We're talking about companies like Kyocera.
05:46Let's go ahead and focus on your core businesses and produce more profits.
05:49So, in these cases, it's all consistent with what Prime Minister Takichi has in terms of let's produce a better
05:56and stronger Japanese businesses and a better and stronger Japanese economy.
06:00So, you know, in a lot of other businesses we're talking about, let's go ahead and build data centers onshore
06:05to protect national security.
06:06I think most investors that are investing in Japan are not looking to take IP out, not going to take
06:11businesses away from Japan.
06:12They're looking to get higher profits for Japanese companies and have them remain in Japan.
06:18So, if the lion's share of your interest remains in the Japanese market, though, I think last year we asked
06:23you about some of the other markets that might be sort of up and coming.
06:25We asked you about South Korea, for example, and the opportunities for activist investment in these markets.
06:32Where else are you sort of turning your attention to at this point?
06:36Well, we're spending a lot of time in South Korea.
06:38We're, you know, extraordinarily happy with the changes that have happened there.
06:42Clearly, there's been an extraordinary run in the back of memory.
06:45And, yes, the kind of the knock-on effect from the enormous investments going on globally in AI.
06:50So, we spent a lot of time in South Korea.
06:53We're spending a lot of time in the additional amount of issuances going on in Hong Kong,
06:56the additional amounts of capital flows as well as need for investment in Chinese companies and greater Chinese companies.
07:07And so, we continue to invest in China and actually in Hong Kong as well.
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