Message from the President Oct.2007

a monthly magazine for our employee Oct.2007

Risk Management

In August, around the time of summer vacation, global stock prices plummeted, triggered by the subprime loan problem in the United States. A friend of mine who owns an investment business sent me an e-mail saying, “It’s summer now, but I feel like going into hibernation.” Since the subprime loan problem occurred, many analyses have been presented that take advantage of hindsight, but it should be obvious to a rational person that excessively large housing loans made to low-income borrowers should naturally carry default risk, or debt collection risk. It seems to me that common sense went unheeded once again.

What’s frightening about a bubble economy, I think, is that conventional wisdom becomes disregarded. Around 1990, the peak of Japan’s bubble economy, Meitec owned a number of Ferraris as part of its employee welfare benefits and lent them out to employees. The Company even owned a disco, although only for a brief period. In retrospect, this all sounds like a ridiculous joke, but in those days Meitec wasn’t alone: major trading houses offered trips abroad to newly graduated employees who’d been accepted informally for hire, and there were sales representatives of securities houses who hired taxis for an entire day to call on prospective customers, or who waved \10,000 notes to hail taxis in the Ginza district late at night. Such practices were prevalent even among average companies. When the people around you start to veer away from the “socially accepted wisdom,” you too can begin to lose your own common sense and sense of values. And here, I think, the weakness of human. In other words, the more the people around you are swept up in a frenzy, the more you feel excluded from it all. As the mass media hypes success stories about money made in stock, bond or real estate markets, eventually you too feel compelled to try your hand at it. But generally, by the time people with common sense yield to the temptation to join in, the bubble’s already past its peak. So the more sensible people are, the more likely they are to get “burned” by a bubble that bursts as soon as they override their common sense and join the craze.

Japan experienced the bursting of its economic bubble in 1990 and then the bursting of the IT bubble in 2001. Now we’ve seen the collapse of another bubble, a “money” bubble that originated in the subprime loan problem. Over the past hundreds of years, history has seen numerous cases all over the world when bubbles emerged, expanded and then burst, and yet the same pattern continues to persist today. Viewed from this perspective, I think we should assume that as long as human beings remain motivated by greed, bubbles will always occur. If that’s so, then it’s important for individuals as well as corporations to direct their thoughts to how to protect themselves against a bubble’s collapse. For example, Meitec adopts a business policy of “not conducting rate negotiation on the basis of the demand-supply balance,” which is a lesson we’ve learned from the past. It’s definitely easier to negotiate for a higher rate at a time when customer demand is strong--when there’s a demand bubble--than in normal times. But if our rate negotiation capitalizes on the demand bubble, we’d likely face a big backlash from customers when demand weakens, which could result in clients’ suspension of business transactions in some cases. Our past experience has taught us that given Meitec’s corporate credo of realizing growth through “harmonious coexistence and prosperity with the Japanese manufacturing industry,” we’ll enjoy a greater return in the medium to long run if we build a relationship of mutual trust that’s affected as little as possible by economic fluctuations. That’s why Meitec has made it a fundamental rule to negotiate its rates based not on the demand-supply balance but on the market value of its engineers?on how much service they provide to the client and how much customer satisfaction they generate. But of course, when demand is strong, we won’t hesitate to go for aggressive bargaining with clients who are reluctant to accept our request for an increase in rates.

The way of thinking I’ve just described is what’s commonly referred to as “risk management.” In today’s world, when the entire socioeconomy is expected to undergo rapid and unpredictable change, you’re required to make decisions that take into consideration the kinds of risks which might arise from the situation you’re in or your conduct. Naturally, the concept of risk management is a necessity for managing a company, but the same can also be said for individuals. Just like it’s uncertain whether stock prices will go up or down, the orders we receive from the market are unpredictable and subject to constant change. The records of orders stored in Meitec’s order-acceptance database are replaced completely in six months. Although individual orders change, it’s still possible to discern order replacement trends by monitoring the flow of renewals. Updating the content of our training program annually based on trends in order receipts serves as part of Meitec’s risk management to cope with the trend of order inflow.

Because the market keeps changing constantly, what we must do--at a minimum--is keep a close watch on developments and take steps to address the trend. You should note, however, that risk management is not just about avoiding risk, it’s also about making a decision to take on risk. So when each of you, as Meitec employees, plans your career, risk management--judging which risk to avoid and which risk to take--should result in career management that brings you satisfaction.

October, 2007