Japan: The Duality of Progress

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The Quote󠀢 💭

The Tweet 🐦

A few days ago Saudi Arabia announced that it won’t renew a landmark deal with the USA - signed in 1974 - to sell oil exclusively in US dollars in exchange for security guarantees. This was also a commitment by the Saudi rulers to use the dollar revenues to purchase US treasuries. This news sent shockwaves across markets with many speculating this to be the end of the US Dollar as the world’s reserve currency. This thread takes a more nuanced look at the issue concluding that the fears are probably overrated.

The Short Read 📝

AI’s $600B Question - by David Cahn

David Cahn is a partner with Seqouia Capital based in San Francisco and has invested in iconic companies like Notion and Hugging Face. In this blog, he argues that the current build out of AI capacity by big tech - that has been fuelling Nvidia’s unbelievable growth - needs to generate almost $600B in revenue to make economic sense.

With the GPU supply shortage easing and hyperscalers continuing to add capacity, how future demand shapes up remains uncertain. In addition, Nvidia is likely to continue launching newer chips that are faster and more efficient making the existing capacity redundant faster. On the demand side, while some AI companies have managed to get to sub- $100M revenue run rates, only OpenAI has scaled to more than $1B - the last reported run rate was $3.4B. As a consequence, how the AI revenue hole gets filled up remains an open question.

The Long Read 📜

The Ballad of Birkenstock - by Bloomberg

Birkenstock is a 250-year German footwear maker known for its orthopaedic sandals. Ever since CoVID, they have had a resurrection and captured the imagination of the fashion world. With succession dramas, family feuds and a resurgent CEO who is an outsider, Birkenstock’s story has all the elements for a blockbuster.

Started in 1740 by a German cobbler named Johannes Birkenstock, Birkenstock’s fortunes have waxed and waned with the times. In the 1960s, their patented footbed sold like hotcakes based on recommendations from German doctors. The rise of the power dressing movement in the 1980s ended the hype. This was also the time that the company was impacted with multiple feuds among brothers who inherited the company from their father. In the 2000s, the entry of Oliver Reichert as CEO helped turn the company’s fortunes turning it into a fashion icon culmination in a multi-billion dollar IPO on the NYSE. A fascinating story!

Publisher’s Parmesan 🧀

Japan: The Duality of Progress

Japan is a country full of contrasts. It has advanced technology like bullet trains and robots, but it also values old traditions like using hanko stamps. Japan used to have the third largest economy in the world, but Germany took that spot last year. So, why is Japan not keeping up?

Japan is often hailed as a beacon of innovation, a nation where bullet trains zip through the landscape and robotics are not just science fiction but a reality. Visitors to the country are greeted with the latest technology, from automated check-in systems that prompt, “I will now register the guest’s information, please press the button to begin,” to the seamless completion of check-in processes. This technological prowess is a source of pride and a symbol of Japan’s position at the forefront of modern advancements.

Yet, beneath this veneer of progress lies a Japan that clings to tradition, sometimes to the detriment of its economic vitality. This dichotomy between the old and the new is a key factor in why Japan, once the world’s third-largest economy, has been overtaken by Germany. For years, Japan has struggled with sluggish economic growth and productivity, partly due to its reliance on outdated technology.

Tradition vs. Efficiency

Take, for example, the ‘Hanko’—a personal stamp used in lieu of a signature on official documents like contracts and invoices. These stamps, which have been a staple of Japanese identity verification for centuries, are still commonplace in daily activities such as receiving packages or opening bank accounts.

However, this adherence to tradition can hamper business efficiency. Japan’s productivity lags behind, at approximately two-thirds of the United States’ level and three-quarters of Germany’s. This stagnation has persisted for years, highlighting the challenge of balancing efficiency with cherished traditional practices.

The result is a nation rich in culture but resistant to change. An old joke encapsulates this sentiment: “How do you know someone works for a Japanese company? Their business card still has a fax number.” 😁😁

Jesper Koll, an economist who has resided in Japan since 1986, argues that it’s not just the technology that’s holding Japan back. The Japanese penchant for precision can be so extreme that if a ‘Hanko’ stamp even slightly touches the line it’s supposed to be on, the entire form is deemed invalid and must be redone. This meticulousness is both a beautiful and infuriating aspect of Japanese culture, reflecting a deep-rooted process orientation.

Stuck in Time

In the wake of the pandemic, the government has taken steps to relax the strict use of ‘Hanko’, allowing for written signatures or, in some cases, no signature at all. Yet, in many official settings, ‘Hanko’ is still frequently used. And it’s not just ‘Hanko’; fax machines are still preferred over emails for sending important documents in some Japanese offices.

Reflecting on Japan’s history of early adoption, such as the introduction of the Walkman in the 1970s and 1980s, it’s clear that the country was once at the cutting edge of technology. However, the transition from analog to digital has been slow. Since the 1990s, there hasn’t been much change; many employees remain with one company for the majority of their careers, wages have stagnated for 30 years, and long work hours are common, particularly in elite government ministries. Despite these efforts, productivity remains low.

A visit to a Japanese Starbucks reveals the labor-intensive nature of the country’s service industry, where a task that might require two employees in the United States is handled by at least five in Japan. This inefficiency is rooted in Japan’s rigid work culture, which often values conformity over efficiency.

The Winds of Change

However, change may be on the horizon, led by Japan’s digital minister, Taro Kono, who is advocating for the country to abandon obsolete technologies in government procedures. Despite the availability of digital alternatives, the meticulous attention to form over content remains a barrier to Japan’s ability to adopt modern, digital technologies swiftly.

Japan has always marched to the beat of its own drum, embracing modern technology while retaining its unique culture and charm. But to elevate its economy and continue growing in the future, Japan may need to carve away some aspects of its historical practices. The younger generation is more open to rewriting the rules, working reasonable hours, and embracing new technologies. This generational shift could be the key to Japan’s ability to adapt and thrive in an ever-evolving global landscape.