Despite government help, business realities limit 3/11 recovery

When the earthquake-triggered tsunami swept through the Tohoku region in March 2011, it not only took the lives of people there, it also killed the economy and businesses that local residents made a living from.

Central and local governments offered an unprecedented amount in aid and subsidies for small and midsize companies and businesses in fisheries and agriculture to help them get back on their feet.

However, many businesses have closed down in the past decade, reflecting the harsh reality of the economic situation in the region.

One day recently, the sound of clanging resonated across the shipyard of Tohoku’s largest shipbuilder, Yamanishi Corp., as machines removed rust from the hull of a vessel.

The vessel in question was a marine research ship undergoing the final phase of repair. The firm’s dock, located in the city of Ishinomaki, Miyagi Prefecture, is one of the largest in the region, measuring 17 meters by 36 meters.

For the shipbuilding company, which in December had its restructuring plan approved by a court-appointed trustee after nearly going bankrupt, the ship repair business is the key to bouncing back.

Next to the dock stands another 166-meter-long slipway. Although the slipway has been in use by the Yamanishi division responsible for building new ships, which had accounted for a majority of its sales, it now stands empty due to suspended operations.

“The company is doing well,” says Hideki Matsushima, the trustee in charge. “Based on its financial situation, including business results and loan repayments by the end of this year, we will considering resuming shipbuilding operations.”

The situation was very different during the firm’s heyday. Yamanishi posted ¥19.8 billion in sales in the business year through March 2010, building cargo ships and conducting repairs.

But when a 4-meter-high tsunami hit the port of Ishinomaki in March 2011, two large ships under construction as well as other production facilities worth ¥10 billion were damaged.

As the shipbuilding industry involves various businesses in areas ranging from production to maintenance, the damage to the local economy was significant. With that in mind, the local and central governments poured in a total of about ¥8 billion in subsidies in order to protect the coastal region’s core businesses.

In February 2012, the Enterprise Turnaround Initiative Corp., a government-backed corporate rehabilitation body back then, decided to fund Yamanishi.

After requesting debt waivers from creditors and getting loan extensions from its main bank, the firm managed to secure funds to help it resume business.

In August 2012, Yamanishi restarted its shipbuilding business and resumed maintenance services as well in January 2014. With subsidies worth ¥4 billion available from the Corporation for Revitalizing Earthquake-Affected Business, a successor organization of the Enterprise Turnaround Initiative, for restructuring businesses affected by the March 2011 disasters, the company also refurbished its dock.

Toru Asano, 79, who served as the president of the Ishinomaki Chamber of Commerce and Industry at that time, believes that without the government’s subsidies, the company would have gone bankrupt.

“(The subsidies helped) lay the groundwork for the company’s restoration and turned it into a symbol of recovery,” he said.

But despite the initial success, the road ahead was bumpy.

Due to the global financial crisis in 2008, shipbuilders were already facing fierce competition to win customers. But Yamanishi lost even more customers after the 2011 disaster, forcing it to take on orders for cheaper ships.

One of the challenges was the high cost of shipping parts and materials, given that most manufacturers are based in western Japan. With the interest on the company’s debt accruing daily, Yamanishi dipped into the red in the five years from 2014.

Struggling to find a way to bounce back while shouldering a debt of ¥12.3 billion, the company filed for protection under the Corporate Rehabilitation Law in January 2020.

Hidehiko Maeda, 72, who served as the company’s president for about a decade through the end of 2013, pointed out that one of the reasons the firm failed was because of its weakened marketing and sales capabilities. The company was forced to close its Tokyo office in 2014 following calls from Corporation for Revitalizing Earthquake-Affected Business to cut costs.

“Even if we have the large facility and equipment, there’s no point if we can’t operate it at full capacity,” lamented Maeda. “We needed to cut workers who could have helped rebuild the business.”

Under its restructuring plan, Yamanishi was allowed to waive ¥12 billion to ¥13 billion worth of debt, but it was forced to reduce the number of employees from about 150 to 70 to further curb expenses. The firm hopes to break even by March 2022 through its two main businesses — repair services and steel structure construction.

But an executive of another shipbuilding company in Miyagi Prefecture is skeptical.

“Even if they focused on ship repairs, it’s going to be hard to keep the large factory up and running. They probably need to take further steps, such as selling one of the properties,” the executive said.

The key to success

What was the difference between companies that recovered and those that did not?

Tadatoshi Oshima, 72, president of Oshima Fisheries Co. in the city of Kesennuma, Miyagi Prefecture, thinks he knows the answer.

When asked by a company executive on the evening after the massive earthquake and tsunami whether he was determined to rebuild the company, Oshima responded: “I am.”

The firm, which processes tuna and bonito, lost three of its four factories located near the port of Kesennuma in the massive tsunami. The remaining factory, which also housed its head office, was significantly damaged.

Even before March 2011, the port city had been faced with poor catches and deepening labor shortages. It seemed unlikely businesses would rebound anytime soon and there was no way to know when they would be able to receive fresh fish from the port.

Oshima decided to focus on processing frozen tuna using imported fish, allowing for year-round operation.

“The longer we waited, the more difficult it would be to resume operations,” Oshima said.

Oshima built a makeshift factory on an elevated plot of land and reopened business of processing frozen tuna in June 2011. Before the disaster, 70% of the company’s operations involved processing fresh fish. But when operations for the main factory resumed in September 2011, Oshima reduced it down to an amount that the main factory could handle on its ground floor.

“If another disaster struck the region, we would cause trouble to our clients, as we wouldn’t be able to deliver fresh food,” Oshima said. He decided to focus on food processing in the belief that changing the strategy would help raise the products’ value.

Oshima Fisheries then moved away from the coast and built a new factory on raised ground.

The company also changed its sales strategy. Before the disaster, Oshima Fisheries distributed its products nationwide, but afterward it switched to only supermarkets across the Tohoku region. The firm introduced new products such as chopped tuna in tomato basil sauce, which was developed by the firm’s female workers. Even though sales plunged to a third of the pre-disaster level, profitability rose.

In the coming years, Oshima Fisheries is planning to install more machines to complement its workers.

“If we cooperate with businesses in other sectors with strong technological capabilities, we can create products of high quality even if we’re short-staffed,” Oshima said.

Even if businesses were able to restore their facilities using government subsidies, many companies nonetheless went bankrupt after failing to regain sales.

According to Teikoku Databank Ltd.’s Tohoku branch, 440 companies in the region had gone bankrupt as of January because of the March 2011 disaster.

Meanwhile, the companies that bounced back with the help of the subsidies were those that quickly narrowed their focus after the disaster in line with a clear understanding of their business prospects. The key was the selection and concentration of resources as well as quick decision-making.

“Before the disaster, we had excess production capacity, and if we wanted to restore operations to the same level we wouldn’t have been able to continue our business,” said Ryuichiro Hiratsuka, 61, president of Yamatoku Hiratsuka Suisan Co., a fish processing firm in Ishinomaki.

Hiratsuka gave up on one of his factories, which had been producing fish paste products before the disaster, and only resumed production of ready-to-eat meals.

He changed his business strategy in response to changing market demand, as delicatessen products were generating greater demand than paste foods. Restarting the business required a new sales approach as well. Hiratsuka’s efforts paid off and his products started to sell well, allowing him to operate his factories at nearly full capacity for the past three years.

“Some firms went out of business due to difficulties in developing sales channels.” Hiratsuka stressed. “Without a good sales channel, business restructuring won’t make any sense.”

Double loans

When the tsunami swept the Tohoku region, all of the state-of-the-art equipment at one fishery processing factory in Miyagi Prefecture was ruined, leaving the owner more than ¥200 million in debt.

The man, who asked to remain anonymous, owed the bank and other financial institutions ¥7 million in interest a year. With a new loan he took to restore the factory doubling his debts, the future looked bleak.

But a ray of hope emerged when an official at the state-run Miyagi Organization for Industry Promotion told him in the fall of 2011 that he may be able to suspend repayments for his initial ¥200 million loan for the time being.

“Maybe the situation will improve a bit,” he thought.

The slight hope soon shattered, though. After a period of negotiation, the plan did not come together and the bank did not give the green light. He got the same response when he approached a similar organization for business restructuring offering support for those with double debts in the wake of the earthquake and tsunami.

The organization would purchase part of the debt, which would allow banks to extend more loans to them. However, in the man’s case, another bank that extended loans to the company for rebuilding the factory did not accept the offer, since it would effectively mean waiving the debt.

“Neither organization was of any help, and I thought the system wasn’t working,” said the man.

But helped by the banks’ grace period for the loans, the company is now improving its sales little by little.

Nevertheless, the prospect of getting out of debt still seems far off. Securing enough cash to run his daily operations is the man’s first and foremost headache for the foreseeable future.

So far, the number of cases in which business support organizations extended double loans to affected businesses was 744, and in about 25% of the cases they have been consulted on. Even though the government aimed for the organizations to offer relief to local businesses, they were not able to do so without the approval of the banks offering the loans.

Unable to live up to the bank’s strict criteria for approval, which was partly based on their business potential or prospects for restructuring, many of those companies were denied support.

“We are a stock company,” an official at the Miyagi Organization for Industry Promotion told the man, outlining the need for accountability when handing out funds. “We were hit by the huge scale of disaster. It’s impossible to come up with a restructuring plan that would generate revenue. Maybe the mindset should have been different.”

Even for those businesses that managed to receive support, restructuring is an uphill battle.

According to the organization, only 160 cases, or 20%, have managed to repay their entire loan, while in 25 cases the companies folded or filed for voluntary bankruptcy. Business was especially affected for fisheries, with revenue deteriorating after losing retailers and with hauls declining.

Due to the tsunami, Hachiyo Suisan Co. in Kesennuma lost all of its six factories, some of which had been built just two years prior, leaving it nearly ¥2 billion in debt.

In addition to government subsidies, Hachiyo Suisan had the Miyagi business support organization purchase part of its debt, allowing the company to receive loans from Sendai Bank.

Through a series of cost-cutting measures — scaling back products that produce little revenue and updating procurement costs and the distribution of human resources — the company managed to find a way to shrink the loan and rebuild the business.

“Thanks to the support, business became more efficient and lean, which makes it easier to continue on with the business,” said Toshiya Shimizu, president of Hachiyo Suisan.

Nevertheless, the future survival of these businesses remains a challenge.

“We need to continue efforts to cut back costs and train workers, as well as revising costs and revenue to repay the loan,” said Shimizu.

This section features topics and issues from the Tohoku region covered by the Kahoku Shimpo, the largest newspaper in Tohoku. The original articles were published Feb. 11 and 13.