Mochiai 3.0 - Japan's quiet competitive edge

Andrew McDermott uncovers how cooperating Salaryman CEOs quietly create more resilient value than limelight greedy Private Equity grand-man financiers

Japan’s market for corporate control is entering a next phase, with Team Takaichi openly re-assessing the desire for national industrial reorganization against the now empirical realities of private equity led financialisation. Part of the motivation here is the deeply engrained due-diligence naturally pursued by Japan’s elite — after PM Abe’s governance and stewardship reforms openly welcomed PE firms and activists to Japan, we now have 10-15 years of empirical evidence and case studies to actually assess how well “American-style financial capitalism” actually works for Japan. Who wins, who looses? Fair enough. However, another motivation is an ideological pendulum swing back towards greater emphasis on top-down industrial policy and “optimizing for national economic security” rather than capital returns. I am convinced this new debate is healthy, will stay balanced, and will keep Japan’s “Capitalism that works” a worthy role model for the world.

So let’s get real: in this article, my friend and fellow Japan investor Andrew McDermott offers insights into how exactly Japan’s corporate leaders operate, adapt to financial-actor pressure, lead in unity, and create resilient competitiveness. He digs into the Toshiba-Kioxia-Bain Capital case to uncover how Japan Inc.’s leaders create both economic value and a resilient future for the nation. This is a story often lost in the never-ending noise of event-driven market capitalism….enjoy, comment welcome; today from a very “Atsui desu ne” Tokyo with many cheers ;-j

招き猫縛り — Maneki-Neko — Beckoning Cat welcoming wealth, good luck and customers — expertly tied-up by the always creative Shibari artist Beni Shibari

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The Hidden Benefits of Mochiai 3.0

by Andrew McDermott

Success has many fathers–Western proverb

It is better to say too little than to say too much–Japanese proverb

Mochiai: the colloquial Japanese term for Kabushiki Mochiai or “cross-shareholdings:” the practice in which related companies own shares in each other. The root characters are 持 and 合, which can also be translated as “hold” and “meet” in the sense of evenly matching, joining together, or forming a balance.

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Congratulations to the investors and speculators in Kioxia. Your profits are your reward. The rest of us must decide what lessons to draw and how to apply them.

Kioxia’s market cap recently exceeded Toyota’s to rank as “Japan’s Number 1.” Toyota, the archetype of “old Japan Mochiai,“ has earned cumulative EBIT of ¥29T since 2018, earning more each year than the cumulative ¥1.2T EBIT earned by Kioxia over the same period. Has the torch been passed to a new generation? Has Bain, the architect of the Kioxia deal, found the key to Japan’s future success: financially “disciplined” pure-plays freed from the tyranny of crossholdings, ably led by financial engineers trained in US business schools? Or is there more to the story: a series of quiet capital transactions between Japanese corporations that have refined Japan’s competitive edge, saving Kioxia in the process?

Is the future Bain’s “Asia Fund VI” or a third iteration of Mochiai: a series of intra-corporate transactions that make financial and strategic sense without sacrificing national security or excessively rewarding financial engineers? Let’s dig in.

We are the heroes

Recently, we have heard a great deal from Bain about its Kioxia success and the implications for Japan and the world at large. The heroes of this story are clear: a team of financial engineers led by Mr. Sugimoto in Japan and Mr. Gross in Boston. They attribute success to “Bain Capital’s global technology investing footprint” that “was vital to understanding the business’s value proposition to customers and the nature and pace of its technology efforts.” Its weapons were not fear, surprise and ruthless efficiency, but “deep market knowledge, extensive local networks and [a] proven ability to drive operational improvement.” Conveniently for Bain, it completed its interviews and its exit a few days before the announcement of a loss of an intellectual property case in the US, a case that began and ended under Bain’s leadership and whose announcement wiped tens of billions of dollars off Kioxia’s market cap (but not Bain’s profits)^[1]. While Bain has been coy about the size of these profits., market observers speculate that the $2bln it staked in 2017 generated proceeds of $30-35bln, making it what the FT deems one of “history’s most lucrative” PE deals. This translates into ~$6bln of performance fees for Bain at an industry standard 20% of profits (exclusive of the 2% annual fee charged to clients and the ¥1bln/year charged to Kioxia itself to help “keep the lights on” at Bain). This heroic story comes at a convenient time for an industry whose press outside of Japan has been unflattering. Bain’s story has been well-told, and critics of the transaction (including yours truly) have been fed a steady diet of crow.

What are we, chopped liver?

But could there be more to the story than the heroics of thirty or so MBAs and Stacey Smith, a former Intel CFO who seems to be the only person Bain placed in a management role? We have heard nothing from the disparate group of METI bureaucrats, low-profile Japanese financiers and corporate engineer/executives who have, collectively, provided far more capital and taken far more Kioxia risk than Bain and its activist collaborators since the 2017 Toshiba recapitalization. This essay attempts to give this group a voice. It seems fair that this voice should also receive the gift of hindsight that has characterized the triumphal Bain interviews that have conveniently coincided with Bain’s complete exitfrom its Kioxia position this past month. While Bain is “all-out” of Kioxia, this team, like Warren Buffett, is committed to its Japanese investments for the long haul.

To simplify the conversation, I’ll create two avatars: an intrepid reporter we’ll call “Rick” and a personification of team “Mochiai 3.0.”

The obvious choice for this second role is Amuro Ray, the reluctant teenage engineering prodigy who leads the good guys against a robot army in the long-running Japanese Gundam series. We’ll give Ray some of the same interview questions that the FT and Nikkei have lobbed at Bain. Perhaps his answers will prompt dialogue amongst the investors who see PE and activism as the only way to play Japan…and the rest of the world.

The Greatest Story Never Told: How Amuro Ray saved Kioxia…and the World

Interviewer (Rick): Thank you, Mr. Ray, for taking time out of your busy day to talk about your role in the Kioxia transaction and in the others that you say are your bailiwick. Could you please start by giving us an overview of what you mean by “Mochiai 3.0.”

Ray: It’s quite simple: Mochiai 3.0 is the third iteration of crossholdings in Japan since 1945. The first was driven by the same engineering forces that had created the keiretsu before the war and that still hold together companies like Samsung and Amazon. The second was financially driven and led to the excesses of the bubble. The third is a return to the first: a series of capital transactions that grow out of operating partnerships and an awareness of national security risks and opportunities. They run the gamut from co-investments to joint ventures to long-term supply arrangements to technology sharing to cross-licensing to all the things that make conglomerates expand and contract. What’s important is that the decisions are

made by people with operating experience who also understand finance and strategy.

Rick: Can you give some “Mochiai 3.0” examples other than Toshiba Memory?

Ray: Just off the top of my head: the recent Berkshire/Tokio deal, the ongoing Rohm/MEI transaction, the Sumitomo/MP Materials/DOD deal, and, most relevant to our discussion, the Rapidus and JSAMsemiconductor investments that cover the high-end and low-end of the semi chain. And, of course, deals that don’t happen fall into the same category in a different way. Examples include the MBK/Makino Milling deal, and the various PRC-linked efforts to buy Toshiba assets. The “good” deals are part of the ongoing optimization of Japanese companies that has driven the explosion of profitability that Jesper’s chart below illustrates. Notably, and despite what you might read, this has happened with very little influence from private equity, or, for the most part, “activist investors.” It has been an organic reaction to opportunities, risks and technology changes encountered in the real world, not to asset allocation models. When done properly, it’s remarkably efficient. That’s why investors like the GPIF can manage so much money so well with low fees and a small staff: companies do the work for them, a fact that Warren Buffett appreciates.

In Praise of the Salaryman CEO — see full argument here

But I should hasten to add that there’s nothing uniquely Japanese about Mochiai 3.0. Examples include Microsoft’s investment in Apple, Apple’s own investment in Kioxia, Amazon (and Softbank’s) investments in OpenAI, and a series of investments made by Intel in its early years. In fact, the best explanation of Mochiai 3.0 was actually given by my hero Les Vadasz, the fourth employee of Intel. He led the design team that developed Intel’s first CPU (ironically, with the help of Japanese engineers). He also founded Intel Capital. His philosophy captures the essence of Mochiai 3.0: “you judge your returnon how you met your strategic goals, and count the money later,” but “the legal, financial and strategic consistency was always there.”

Rick: What’s the opposite of Mochiai 3.0?

Ray: The idea that asset allocation by financial engineers can create value at the portfolio, company or national level without managers actually learning how to do the thing being managed. A good overview can be found here. It is the replacement of men like Bill Knudson and Fred Burg with finance specialists who, even when they are right, create high frictional costs. Investment bankers are valuable, and I’m sure the bankers and consultants who work at the various investment firms trying to reshape Japan are very good at their jobs. But, as America and the UK have shown us in recent years, a background in investment banking or consulting does little to prepare anyone for the exigences of running an actual business. In fact, too much financial expertise can be dangerous because, as Sir George Buckley wrote, “In science and engineering-based companies, engineers know the art of the product possible. Finance majors don’t.”

Sir George personifies the spirit of Mochiai 3.0. He’s an engineer with multiple patents to his name, experience as CEO of 3M and chair of Smiths, and an outspoken critic of the “GE approach” (which is essentially the PE approach) before GE’s failings became obvious. That’s why Nakanishisan asked him to be the first foreign board member of Hitachi, which is of course the best example of Mochiai 3.0.

Rick: Can you expound on how Mochiai 3.0 worked in practice at Toshiba?

Ray: Sure. For starters, we put most of the capital into the buyout on day one. Of the $18bln headline number, Bain itself only contributed $2bln. Toshiba and SK Hynix each contributed over $3bln with Hoya also making a significant contribution. Our hope was to manage Toshiba the same way we had at Hitachi by putting capable board members like Osamu Nagayama and George Olcott in place, but we ran into a roadblock erected by activists who almost derailed the project by replacing those board members with a slate of financiers. We took a different path to the same goal, bailing Bain out at least three times along the way. We did this despite the fact that, at the same time Bain was receiving subsidies to build out a supply chain independent of the PRC, Bain realized $4bln in proceeds from an investment in Chinese data centers.

Rick: Can you be more precise in what you did so we can understand the math?

Ray: Well, if I were trying to market our record, which I’m not, I’d point out the following:

● In 2019, we led a ¥1.3T refinancing. The total package consisted of ¥1T from SMBC, MUFG and Mizuho and ¥300bln from the government-backed Development Bank of Japan. Bain put no new capital into the deal.

● In 2023, the Japanese investment firm JIP put its own money alongside “Mochiai 3.0” investors to buy Toshiba after a tumultuous period of conflict with activist investors that Goldman Sachs had introduced. JIP’s 20 or so partners included Rohm, Orix, Chubu Electric, and Iwatani. The rationale given by MinebeaMitsumi for its participation typifies our spirit. JIP is notable for its low profile and its willingness to stay in the background while supporting operating executives…a key tenet of “Mochiai 3.0.” Again, Bain put no new capital into the deal, which relied heavily on Toshiba’s support.

● By 2024, Kioxia had violated covenants on debt that approached, if not exceeded, the amount that had started this entire process in 2017.

● Also in 2024, Kioxia received over $1bln in government subsidies.

● The 2023 JIP+”Mochiai” price for Toshiba, which included 40% of Kioxia at the time, was negotiated down to ¥1T. In the three years since JIP took over Toshiba, the existing management (which had been opposed by activist shareholders) has led Toshiba to a dramatic operating recovery, reporting approximately ¥400bln of EBIT in its last fiscal year.

Rick: What’s your bottom line?

Ray: You run your own numbers. This is just an estimate because Toshiba doesn’t disclose its balance sheet. We do know that it took on about ¥1.2T of debt in 2023 and that it has sold its Kioxia stake down from 40% pre-IPO to 16% today. However, if you take market estimates for sale proceeds plus ~¥6.8T of Kioxia at market prices in early July and you apply a 15x EBIT trailing multiple to the rest of Toshiba (low relative to comparables) and you assume that cash flow over the past two years has paid down ¥200bln of debt, you can get to an equity value of ¥12-13T pretty easily.

Rick: So you’re suggesting that a ¥1T investment by “Mochiai 3.0” made three years ago could be worth 12-13x its original cost? And are you implying that, if Bain’s equity in Kioxia had been treated the way Toshiba was in 2017 rather than being repeatedly bailed out by taxpayers, banks and other equity players, then the Bain equity stake would have been considerably diluted if not wiped out entirely?

Ray: You’re saying this, not me. All I can say is that this transaction, like all other Mochiai 3.0 transactions, had strategic as well as financial goals. Yeah, we have made a lot of money on this so far, but, as you’ve pointed out, we are still invested in various ways. There’s no exit for us here. As far as Bain’s (and Goldman’s) profits go, it was essential that they make a lot of money on this deal for reasons that have nothing to do with Kioxia per se.

Rick: Maybe this is a good time to back up and talk about the ends that the means of Mochiai 3.0 are supposed to serve.

Ray: That’s simple: national survival. Our prime directive for the last thousand years has been to preserve independence from China and Russia. We faced a delicate situation in the mid 2010s: US elites, South Korea and the Philippines were all drifting into China’s orbit even as we watched the degradation of the Seventh Fleet. We needed to do several things with the Toshiba transactions: win a few US elites to our side without compromising our manufacturing base, begin the hard work of reconciliation with South Korea and maximize the impact of our human capital on the areas that we (and China) knew would matter most in a decade. These included energy abundance, semiconductor process technology and AI-enabled manufacturing for both civilian and military purposes. The means have changed over the years, but the end remains the same: preserve our strategic autonomy, which can only be done by retaining the ability to make things that matter ourselves or with close allies.

Rick: You seem to have an affinity for Mr. Vadasz. Is there more to the story?

Ray: Yes there is. Mr. Vadasz is one of my personal heroes, and his story bears directly on our topic. Like his boss Andy Grove, Vadasz escaped from Communist Hungary. He competed directly with Japanese firms, including Toshiba, in the 90s. His explanation for their success surprised me. He did not credit subsidies or a willingness to sacrifice profits for market share. Instead, he told me that: “the Japanese taught us that quality didn’t have to be expensive.” Mr. Vadasz went on to mentor Pat Gelsinger, the CEO picked over Stacy Smith to run Intel.

This relates to Kioxia because Mr. Smith, as CFO of Intel, had overseen a dramatic change in Intel’s own balance sheet from net cash to net debt. His capital strategy prioritized return of capital and executive compensation over capital spending and coincided with a decline in Intel’s manufacturing leadership. What’s important for everyone to understand is that the other memory players, Samsung, SK Hynix, and Micron, carried substantial net cash throughout business cycles, a situation that persists today even as Kioxia’s secondary share sales have been used to fund Bain’s exit strategy rather than to shore up Kioxia’s balance sheet.

It is not surprising that Bain found such a kindred spirit in Mr. Smitn. After returning to the Intel board (while concurrently serving as chairman of Kioxia), Smith oversaw the firing of Mr. Gelsinger (even though his operating plan has, by common acclaim, saved Intel). It is worth reading more about Gelsinger and Smith and the Intel Board here and here and here, as Bain’s choice of Mr. Smith as its sole operating executive (rather than an engineer like Mr. Gelsinger) speaks volumes about the reason we had to step in multiple times to salvage the Kioxia deal.

This matter of capital structure is one that the media cheerleaders consistently underplay, probably because they simply don’t understand what is at stake. May I share something that Mr. Vadasz shared with me several years ago?

Rick: Please do.

Ray: I asked Mr. Vadasz what he thought about balance sheet strength in relation to semiconductor and other manufacturing companies. Here’s what he said:

In the old days the philosophy was driven by Gordon Moore, who really believed that people ought to be able to afford what they do. Anyway, we strongly believed that we should have a strong cash position. It was almost like a security blanket. Yet, we were a pretty egalitarian company. Most things we did were with no frills. We did not have assigned parking spots for executives. No separate eating places for executives, cubicles for all, including the CEO. No private jets.

Stock buy-backs never were big enough to jeopardize what we felt was an essential minimum. Frankly, I do not remember what we called a minimum at that time. Remember, that a wafer fab facility costs billions and leading edge tech companies need new facilities all the time.

One thing for sure: we were never, and I mean NEVER were guided by what the market felt was the right amount of cash to hold. It had to be comfortable from an operating point of view. All of us in top management roles would have defended this position, if needed.

A funny illustration of how extreme this went: in the early days we were proud of building and owning our own buildings. It took a lot of effort by one of the new CFOs to convince Gordon to sell the building, get the cash, and lease back the building. It was just not in his DNA. Anyway, we finally did it.

I do not know how to operate a company with the kind of leverage that some do. At times it feels like they are building a house of cards. If Japanese companies operate with more cash on hand, more power to them. It just feels intuitively obvious that they are more shock proof than the highly leveraged ones. The old school wasn’t that bad… we were never limited by cash, just by our ability to create growth.

Rick: Given the above, how would you assess Bain’s stewardship?

Ray: I wish I could be more enthusiastic, and I hope that I’m wrong. Perhaps Bain’s employees brought patents or operating expertise similar to what Pat Gelsinger brought Intel–real technical skills that will pay off in the years to come. What’s certain is that they have left Kioxia shockingly undercapitalized relative to peers.

The above table and the recent equity offerings by SK Hynix (~$26bln) and CXMT (planned ~$8bln) show that, under Bain’s leadership, Kioxia has disregarded the advice of Mr. Vadasz and the example set by peers. These firms, all of whom are led by experienced operators, understand the capital intensity, technical pace and cyclicality of this business. While Bain has been using this hot market to sell shares on its own behalf, these peers have been preparing for the next cycle by strengthening their balance sheets. The amount SK and CXMT are raising this month for operations approximates the amount Bain has taken for itself in equity sales.

It would be one thing if Bain’s exit had come after Kioxia had surpassed its competitors in the marketplace and had a balance sheet that was at least in line with, if not stronger than, its peers. The opposite is the case: Kioxia has lost share in its core business in each of the last four quarters, its technical edge in NAND is shrinking, and it has completely ceded the HBM market to peers, including an upstart Chinese competitor who has done what (supposedly) was impossible: start a NAND and HBM business from scratch.

Curiously, in its capacity as the controlling shareholder, Bain (somewhat reluctantly) agreed to an IPO price of ¥1,455. At this price, Bain allowed the company to sell 21.5mm new shares while selling only a few of its own shares. Yet, as the price increased above ¥75,000, Bain was a seller of its own position without allowing the company to raise capital for itself alongside its competitors.

Rick: This seems like a good time to talk about the SK relationship. Can you discuss?

Ray: At the company level, it was very complicated. SK is a strategic rival. Viewed narrowly, including them made no sense because SK could (and did) use its position to influence management decisions. However, in the context of Japan/Korea relations, we’re cautiously optimistic. Our human capital is limited. We have major projects at the high end (Rapidus) and the low end (JSAM). SK’s balance sheet is where ours needs to be. Our hope is that five years from now, we find a way to deepen the SK partnership, perhaps swapping NAND capacity for high-end technology developed by Rapidus and/or in conjunction with TSMC. This is one way for us to confront the PRC onslaught. It fits into the broader picture of increased military, energy and diplomatic partnerships we are forming with Korea and could be a critical component of making Tokyo a regional financial center.

Rick: It seems that making Tokyo a financial center modeled on NYC or London could paradoxically weaken the very industries you seek to promote. Charlie Munger once said: “Show me the incentives and I’ll show you the outcome.” He also pointed to the failure of Intel as a cautionary tale of incentives gone awry. Are you concerned that paying $5bln+ in fees to Goldman and Bain while your Mochiai players get a fraction of this while taking the lion’s share of the risk will lead to preverse outcomes? Will you start to get more bankers when you need more people like Les Vadasz, Pat Gelsinger, Fujio Masuoka and even Zhu Yiming?

Ray: It’s a real risk, but one we thought was worth taking. Of course we never imagined the fees would get this big, but we felt we had to throw these guys a bone. We made a strategic mistake in the 90s by taking for granted the affections of the financial and academic elites in America and focusing on winning the hearts and minds of middle America by investing nearly $1 trillion and creating 1 million jobs even as the finance guys sent 5 million jobs to China. We succeeded in this task, but were outmaneuvered by the PRC at the elite level. By 2010, a private equity banker could joke that “Japan is just an island we fly over on the way to China.” His NACUBO audience included most of the leading endowments in the USA. China’s $4T+ private equity market was of course always directed by the CCP, but it generated enormous fees for the PE and investment banking firms who controlled every lever of US government policy. They also gave generously to their alma maters, most of whom have developed partnerships with China’s leading engineering colleges and filled their endowments with China specialists. As good a deal as Kioxia has been for them, Bytedance remains the largest position for most endowments despite bi-partisan recognition of its role in the CCP’s arsenal.

In fact, even while Bain was taking taxpayer money in Tokyo to help fend off Chinese competition, it was simultaneously profiting from China’s AI strategy via its investment in Chindata. And the ties between PE, CCP tech prowess and US educational institutions remain powerful. Bain itself remains committed to China, as does Cornell, the alma mater of Bain’s China head. The Cornell China Advisory Board includes Bain’s China head and all the best customers for Chindata. This Board is a who’s who of China AI prowess, including several members of the Pentagon’s entity list. Cornell once boasted one of the world’s best Japanese/Chinese immersion programs (called FALCON). It closed this program, but opened a China Center generously funded by the dollars generated by Bain and others in China.

In the long term, we have got to figure out how to change these incentives. In the short term, it was important that this deal “work” to at least get us a seat at the table within international universities, from Oxford to Harvard to MIT to Princeton to Stanford to Yale to Notre Dame. Kioxia has made an impression, but CCP dollars continue to dwarf Japan’s in financial and human capital terms at most schools.

Back at home, we’ve taken steps to ensure that Mochiai 3.0 remains in control of critical assets while allowing PE firms to bid against each other for assets that don’t matter very much (much as America let Japanese firms bid over the odds for Pebble Beach and Rockefeller Center). This has predictably elicited calls of “backsliding,” but we think the problem will take care of itself as the returns come in from the deals we did not backstop, like Calsonic (twice bankrupt) and PHC Holdings (five CEOs, multiple scandals). When investors compare the risks and returns of these transactions to what “plain old Japanese public companies” offer at a fraction of the cost, we think there’s a good chance that a “new Tokyo” financial center model might emerge. The deals that work best tend to be those with in-place Japanese management, like the Hitachi spins to both public and private equity. A broader public market will absorb most of these companies directly via spin offs that don’t require a trip through the PE cleaners. This is what Sony did with Sony Financial and what Western Digital did with its own memory business (an inconvenient truth for Bain).

But a lot of this depends on two things: whether global investors ever embrace the concept of Mochiai 3.0 and whether we can reduce the stranglehold the Big Three brokers (our weakest link) have over the investment management industry. Progress on these two points must come from outside the industry. There are encouraging signs. The FSA understands some of the issues and Berkshire Hathaway has provided a clear example of the benefits of joining Mochiai 3.0

The “Tokyo model,” if adopted, will be one that recognizes and promotes the idea that the asset management industry is an important supporting actor in any economy, but cannot ever be the creator of value. Keeping this balance is important. In the long-run, as both Palmer Luckey and Chris Miller (author of Chip Wars) argue, our marginal “incentive” dollars will be best spent not on investment fees but on educating more engineers ourselves and resurrecting the “defector visa program” to get some of China’s best players on our team. Imagine if we offered $6bln to the top 30 engineers at CXMT rather than to the top 30 partners at Bain? If this sounds crazy, it’s not. This is the playbook the CCP is running right now, and it’s the same one that helped us win the Cold War. There are over 2 million Chinese living in Japan, including some of the most innovative tech founders. Let’s get more.

Rick: Is there anything else you’d like to say to those, including Japan’s own investment banks, who are arguing that Japan needs a lot more private equity activism and a lot less “Mochiai” of any flavor?

Ray: Well, I suppose I’d like to close with my own story. Like Tony Stark or Palmer Luckey or Bill Knudson or Soichiro Honda, I was raised in an environment conducive to making things. Right now, there’s a fearful symmetry between the financial engineering talent flowing from the US to Japan and the actual engineering talent flowing in the other direction. The US, while sending legions of investors intent on “fixing Japan,” is asking Japan not just to pay for rebuilding America, but to show America how. Supposedly “inefficient” Japanese companies are sending engineers to train Americans in everything from making steel to nuclear power plants to shipbuilding to machine tools to quantum computing to robots. The decline in America’s ability to make things has been catastrophic, not just for America, but for us. Compounding this problem, there has been a generational collapse in the US/Japan education exchange even as US elite educational and financial institutions continue to spend energycourting China. It’s very curious to see that China is also trying to attract our engineers while seeming to have more than enough bankers.

Salaryman — by the legendary Ebisu Yoshikazu, manga artist and actor, born October 1947

We need more people who know how (and want to) make things outside the CCP. My hope is that our story might convince more young people to follow the path of the Quad Scholars, and Lotus scholars towards making “stuff that works.” If we don’t do this, we lose. I’m haunted by these two quotes:

The lesson from history and industry is clear: leadership by engineers and builders produces lasting strategic strength; leadership by financiers alone optimises for short-term gains at the expense of long-term readiness. David Murrin

We’re throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity. Nobel Prize-winning economist James Tobin quoted in: When the Machine Stopped: A Cautionary Tale from Industrial America

But I want to end on a high note. In the final analysis, the quality of our people, not our technology, will win this battle. If we don’t promote human flourishing and celebrate the redemption story that is the real message of Asia since 1945, then it doesn’t matter how many memory chips we make. Ray Dalio’s China dream will come true and Pax Nipponica will die on the vine. But if we can build on the human connections fostered by groups like the Bridging Foundation and modeled by the Navy interpreters and their teachers in World War II, we’ll win this walking away. I’ll close with a more optimistic quote from the former head of the University of Chicago whose spirit, I’m happy to say, lives on at schools like Vanderbilt today:

Now the only defense that any nation can have is the character and intelligence of its people. The adequacy of that defense will depend upon the strength of the conviction that the nation is worth defending. We have repeated to ourselves so much of late the slogan “America must be strong,” that we have forgotten what strength is. We appear to believe that strength consists of masses of men and machines. I do not deny that they have their role. But surely the essential ingredients of strength are trained intelligence, love of country, the understanding of its ideals, and such devotion to those ideals that they become a part of the thought and life of every citizen. Robert Hutchins, The Great Conversation.

Rick: Thank you, Ray, for all you’ve done. Perhaps your story will lead to a more balanced assessment of how Japan’s “Capitalism that works“ can be improved without being broken.

Ray: You’re welcome, and thank you for asking the right questions.

Thank you for reading.

The opinions expressed are my own. They are not intended as investment advice. I currently own and may in the future own positions in securities mentioned in this article.

Andrew McDermott Nashville, July 2026

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Here a link to Andrew’s previous guest contribution What if Japan is winning? Buffett & Japan which include his bio & photo

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^{Quick addendum}

On Friday, July 17, Kioxia’s stock plunged 16.1% to ¥52,110 on the Tokyo Stock Exchange. This single-day rout wiped out approximately ¥10 trillion (roughly $64 billion to $65 billion USD) from Kioxia’s market capitalization on that day alone.

The bottom line is that the decline in market cap on July 17 of $64bln is ~2x Bain’s estimated profits on the deal. Bain did not have to disclose any risk factors while selling its shares on the market (though a good attorney may find it worth his or her while to make the case anyway). If Kioxia had done a secondary, it probably would have had to disclose the details of this case and might have been advised not to do a secondary until it was complete. The actual liability here is not yet known, as it is a running total. $250mm since 2021 is $50mm a year, capitalized at 20x pretax=$1bln, so the market has perhaps overreacted to the financial news itself. But the market might be reading into this news a view that Kioxia’s technical lead over peers is even narrower than assumed. That would be a logical assumption, given that no one of the stature of Dr. Naruke was added to the management team by Bain after his untimely 2020 passing, which, interestingly, was a year before the lawsuit was brought by Viasat. Of course we’ll never know the details, but it seems unlikely that such a technical problem would have passed Dr. Naruke’s sight without his taking a more than passing interest in the details of the technology. With all that said, this isn’t the first time there’s been an IP lawsuit involving Toshiba. It lost a flash case in 2005 against what is now Micron for even larger damages (enormous if adjusted to today’s prices). But it didn’t sell equity in the midst of the lawsuit. That’s the key difference here.

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