Japanese Reverse Psychology

The Real Estate Espresso Podcast

Japanese Reverse Psychology

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Japanese Reverse Psychology

Welcome to the Real Estate Espresso podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re talking about the investor mindset.

A few years ago, I wrote the book Magnetic Capital. That book was written based on observations I made when I was raising capital in the tech industry. Then I made a left turn in my career in 2009 and moved into the world of real estate investing. I used my own funds at first until I ran out, and then we learned the process of raising capital, discovered it was essentially the same.

At the core of any investment, there’s five principles. And when all five of those principles are present, raising money is virtually effortless. When one or more of those principles are missing, raising capital gets difficult in a hurry.

When a company makes a decision to set up manufacturing, to build a factory and employ hundreds or thousands of people, they’re making an investment. And guess what? The same principles apply in that scenario as well.

So the five principles are:

Number one, relationship. People invest with folks that they know, like and trust.

Number two is trust. Trust is foundational to making an investment, a psychological contract that has a lot of layers to it. Trust is built slowly over time and can be ruptured in an instant.

Number three is track record. That’s a subset of trust, which is looking at what happens over an extended time period.

Number four, is there indeed a compelling opportunity?

And number five, is there an alignment of goals between the goals for the money and the goals for that particular project?

The relationship between the US and many of its trading partners are frayed right now, even if the heads of state meet together for a photo opportunity. Right now, we’re seeing two major effects from the current international trade war. The consistently moving goal posts are eroding trust amongst international investors. This is causing some major international companies that currently have major operations in the US to quietly move production out of the US.

The US is ~~rumoured~~ 📝rumored to be bringing new legislation to create incentives for setting up new manufacturing in the US. That legislation is being drafted right now. Obviously it could change between now and the time it’s tabled. But early ~~rumours~~ 📝rumors I’m hearing, through sources, suggest that these incentives will in fact be attractive.

The problem is that the psychological contract of trust is a fragile one. Companies such as ~~Beckmann~~ 📝Beckman in Japan and ~~Corea~~ 📝Korea are increasingly reluctant to make those investments, because trust is being broken with each change in policy. Even if the policy this week is favourable, there’s no confidence that there won’t be a change in policy in a week that will upend the investment thesis.

So, in the automotive industry, several Japanese automakers who have manufacturing operations in the US, Canada and Mexico are electing to shift a larger portion of their manufacturing outside the US. That sounds counterintuitive. After all, all of these moves are designed to maximize investment in the US, but it’s in fact having the opposite effect.

The auto manufacturing supply chain is complex. The current tariff regime imposes tariffs not only on finished goods, but also on parts each time they cross the border. For example, right now it’s more advantageous for Subaru to stop manufacturing in the US at their Indiana factory and move production of the Outback back to Japan. They’re also enhancing production in Canada.

You see, Canada has a free trade agreement with Japan, and when you do the math it’s actually cheaper to import cars into the US from Japan than to manufacture them in the US when many of the parts are in fact coming from Japan.

Other Japanese manufacturers have also started ~~shutting~~ 📝shifting production. Some have moved production back to Japan, but increasingly those who already had manufacturing in Canada, specifically Honda and Toyota, ~~made decisions manufacturing to~~ 📝made decisions to shift manufacturing to their Canadian plants.

The Canadian dollar is depressed right now compared with the US dollar, and as a result the labor costs in Canada are lower than they used to be. But quality is still extremely high, and Canada brings something the US lacks right now, and that is stability.

Mazda, Subaru and Mitsubishi have moved their R&D operations in North America and their logistics teams to Toronto.

The province of Ontario has 7 factories: 5 make cars, one makes engines and 1 makes trucks. Together, the plants employ 30,000 people directly and of course thousands more indirectly. These Canadian plants are not just making cars for the US or Canadian market. Many of these Canadian-made Japanese brands are ending up in markets around the world.

Now, I’ve spent considerable ~~in~~ 📝time in Japan. I’ve been there at least 20 times. I wouldn’t even consider myself a world-class expert on Japanese culture, but I think I understand Japanese culture better than many people who might just have a Washington-centric view of the world.

Japanese companies place a lot of importance on building relationships, and these relationships need to be on a foundation of trust and consistent track record. Japanese companies make investments for the long term. Even private companies that are big brand names in Japan, names you would recognize, have their roots in government in Japan. They are all about stability and predictability and legacy.

They literally personify the culture of a slow, steady, relentless competition to win a race. If Americans embody winning a sprint, the Japanese embody winning a marathon. And that is a distinct difference in culture.

When they look at Canada, they see a steady, consistent environment in which to invest, and when they look at the US, they see a chaotic environment that can’t be trusted. The unpredictability of the White House is an intentional tactic designed to maximize negotiating leverage. But unfortunately, it’s having the opposite effect and repelling investment.

So if you’re investing in real estate, in the shadow of a Japanese manufacturing plant located in the US, be aware that those locations may quietly shrink with no major announcements.

As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk again tomorrow.

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