By Martin Hutchinson
As investors, we can rejoice in the work ethic of Asian companies, as well as their inventive technology and presence in some of the world's greatest growth markets. But there's one "bad habit" that Asian management just can't seem to shake and it's one investors need to look out for: Trying to build businesses in the United States, and devoting huge amounts of shareholder resources in the process.
Nomura Holdings Inc. (ADR: NMR), the Japanese investment bank, is a good example of this bad habit. On Tuesday, Nomura reported a loss for the quarter ended June 30 of $770 million (84.3 billion yen) due to a write-down of $575 million (63.1 billion yen) on its exposure to monoline insurance companies. Nomura also had a $190 million 21 billion yen) loss on its investment in Fortress, a U.S. hedge fund.
These losses came only three months after Nomura declared a loss of $1.5 billion on write-downs due to its bond insurer exposure in March 2008, and nine months after declaring a $700 million write-off of its subprime mortgage exposure and exiting the business.
This is the third or fourth time this has happened to Nomura, ever since it started serious international expansion in the early 1980s. It puts lots of resources into businesses in New York, or sometimes London, then a few years later retires to lick its wounds after reporting huge losses.
Unfortunately, it is not likely Nomura's losses will cure it of its bad habit this time around, either.
Nomura President Kenichi Watanabe told executives in March that the firm would "aggressively take risks" and boost profit by expanding its global investment banking, fixed income and private equity businesses. He also told The Financial Times that Nomura should expand aggressively internationally, using London as its international "factory" in which products would be developed and exported to both New York and Tokyo.
Nomura is the undisputed leader in investment banking and brokerage in its home market. A year ago, it might have worried somewhat because Citigroup Inc. (C) bought a majority stake in its nearest competitor, Nikko Cordial Corp. (PINK ADR: NIKOY). However, the sub-prime crisis broke last summer, and has enveloped Citigroup in an ever-increasing spiral of losses and disasters. Thus, the last thing Citigroup has thought about is aggressive expansion in Japan, so Nomura should easily able to pick up a few more points of market share in its domestic business. But to do so, Nomura needs to shelve its ambitious U.S. expansion plans and focus on its own backyard.
Nomura is not the only Asian firm to fall prey to the allure of U.S. expansion. SK Telecom (ADR: SKM), the South Korean wireless telephone giant, has more than a 50% share of its domestic market. And the new government has finally allowed it to push aggressively for expansion. SK Telecom also has a joint venture in China, one of the largest consumer markets, where it has made more than a 50% profit in two years. The South Korean telecom has another major position in the cell phone market of Vietnam, one of the fastest growing and most exciting emerging markets in the world. In short, SK Telecom profits should be rocketing through the roof.
But they're not. Instead, after having already blown $500 million last year on a joint venture with Earthlink Inc. (ELNK) in the United States, SK Telecom is now attempting to buy a minority stake in Sprint Nextel Corp. (S), a money losing company that is likely to cost the South Korean firm between $3 billion and $5 billion. This is madness; SK Telecom is throwing away both the cash flow from its existing Korean operation and the exciting growth potential in China and Vietnam to pour money into the U.S. telecom market that is both less advanced technologically, and less attractive in terms of growth.
Tata Motors (ADR: TTM) is another fine example of this "bad habit." Tata was not content with its the Tata Nano in late 2008, which is priced to sell for $2,500 and could revolutionize the Indian, and potentially the world automobile market. Instead, Tata bought Jaguar and Land Rover from Ford Motor Co. (F) for close to $3 billion this year. And while those brands may be very attractive long-term strategic purchases, their large price tag has left Tata Motors short of funds at a time when it needs to devote resources to the Nano project.
As a direct consequence of the purchase from Ford, Tata Motors is now proposing a major series of stock issues, which will inevitably dilute current shareholder equity and reduce the value of their holdings. With interest rates in India rising and the economy slowing, the risks for Tata have been notably increased – simply because the company could not resist Western expansion when it did not reliably have the funds in-house to undertake it.
Nomura, SK Telecom and Tata Motors are all fine companies. But each would be even better company if management had not succumbed to the fatal temptation of pouring money into the U.S. market where they had no significant comparative advantage.
Their shareholders are suffering accordingly – Nomura is down 28% in the last year, SK Telecom is down 25% and Tata Motors is down 43%.
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