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KAGA ELECTRONICS STORY

Founder tells his story
Sentiments behind the establishment
of Kaga Electronics—The reason we are,
who we are

01

Kaga Electronics was founded upon the principle of transparent management

I was born in Kanazawa City, Ishikawa Prefecture. My father was a very industrious man and my mother was a stickler for discipline. I studied hard through middle school and attended a vocational high school. However, after one year I dropped out. In those days, most of the people I knew went to work after they graduated from middle school. I was envious seeing them earn their salary on their own. So I decided to drop out of high school and go to Tokyo. I asked an uncle who was working in Tokyo to find me a job. It was through his introduction that I was hired by a company that manufactured variable resistors. For around two years I worked on the assembly line and then I moved on to work in sales.

The main part of my job was to go to Akihabara and sell the products our company made to electronics trading firms and setmakers that manufactured stereos and other products. Sales was a good fit for me. I went out drinking, played mahjong, and went fishing with my customers. In time we became friends. I also made acquaintance with many wholesalers. This is how I learned that companies could not manufacture their products only with the variable resistors that we were supplying them. I began to take an interest in different types of electronic parts, which range in the thousands, and thought it would be interesting if I could work at a company that handled all of these parts.

Ultimately this is what motivated me to quit my job. I went to work for a former sales colleague that had started his own company. However, I quit after only six months. I discovered that my friend was very secretive and would not let me in on how the company was doing financially. Rents, salaries, expenses, everything was kept secret. The way he operated the company was definitely not above board.

I believe that a company belongs to its stakeholders and that everything, including its finances, should be transparent. If the company is profitable because of its employees’ efforts, then everyone should have a share in its profits. During hard times, everyone should practice a little endurance and perseverance. I believe this is how management should be carried out. I went out on my own and founded Kaga Electronics based on this principle. The name of the company came from something my mother said to me. I had asked my parents for the startup money. After they somehow raised the money I needed, my mother told me she hoped that my company would grow to become as large as the “fiefdom of the Kaga clan”. (Kaga was the wealthiest clan next to the shogun. Its wealth, measured in rice, was said to be equivalent to 330 million pounds of rice.)

02

Aiming to give to the world, people, and employees

When Kaga Electronics was founded, there were nearly 1,000 companies in Japan, both large and small, that were categorized as electronic parts trading companies. Today there are at the most 200 companies. I believe the reason Kaga Electronics is still in operation today is due to its transparent management and because all of our employees are encouraged to think like management.

When I first started the company I did not envision anything extravagant. However, once I got started, Kaga Electronics gradually gained more supporters and our capital increased. Basically, more and more people began to entrust their futures with us. With this came greater responsibility. I felt it was my duty to ensure that each and every one of my employees could stand on their own feet and attain happiness. The first thing I had to do was boost the company’s performance. However, there are limitations to what one can do alone. I had to convince everyone to work together. The Kaga Electronics you see today is the outcome of our efforts. I will continue to work knowing that my employees are constantly looking to me as an example.

03

Personal connections are a valuable asset and inventory is a liability.

Our precious startup capital disappeared in no time. Starting up the company involved purchasing telephones, desks, business cards, and other items necessary to carry out our operations. However, luckily for me I had one valuable asset. This was the personal connections I had developed during my years doing sales. The first step I took was to print out business cards with my name as the president of Kaga Electronics Co., Ltd. I handed these out to everyone I had done business with or whom I had a connection with. My sales pitch was that we weren’t concerned about the size of the order; we would deliver whatever part our customer needed, ever if it took us all night to find. Many of the people I spoke to placed orders with us right away. At the time our company was like a general appliance store that would carry anything if the customer asked for it. I was grateful for the orders we received. It made me realize just how important it was to create and have bonds with other people.

Another issue was money. However, this lack of capital resulted in an unexpected byproduct, our order system. This same order system continues to be the backbone of Kaga Electronics today. Since we did not have ample capital, we were not able to purchase extra product. But this meant we did not have inventory. This left us with no choice but to place orders for product after we received an order from our customer. This zero inventory “flow” management became the fundamental principle for how Kaga Electronics receives and places orders. Consequently, we view inventory as a liability. This may seem like a harsh way to phrase it but without surplus capital, inventory would have been a dormant capital investment. Investing what capital we had in inventory would have meant borrowing money at interest when we required capital for other purposes. In addition, inventory would mean incurring other costs including rent fees for storage space and insurance premiums. This is why we view inventory as a liability. This is still imprinted in the DNA that runs through the corporate veins of Kaga Electronics today.

04

We pick up on trends by listening

A key factor that propelled the growth of Kaga Electronics was our ability to accurately hone in on trends. The first opportunity came with the wireless CB transceiver fad. This was around the time of the first oil shock. The yen had sharply appreciated in value against the US dollar and consumer prices soared. There was a shortage of daily goods, including toilet paper. It was around this time that the demand for wireless equipment among truck drivers in the US increased considerably. Due to the scarcity of gas at the time, radios became a main, and important, mode of communication. Truckers used their radios to share information on the next available service station.

Japanese manufacturers took orders for these radios but soon ran out of parts. To fill the parts orders we received from these manufacturers, we had to search the globe. We looked to other trading firms with which we had developed friendly ties and were finally able to procure parts from China, Russia and Hungary. It was this experience that prompted us to begin establishing companies overseas. Essentially, our present global network evolved from our goal at the time to satisfy the needs of our customers.

After the oil shock, the world entered a new phase. This was marked by the introduction of Space Invaders, a game that took the world by storm in the late 70s. Before the advent of this game, Japanese companies, led by the semiconductor industry, had begun manufacturing integrated circuits. Unfortunately, at the time there were no computers or similar types of hardware that required the use of ICs. In other words, there was supply but no demand. The development of Space Invaders changed all of that. It created demand for ICs. Kaga Electronics stepped in to mediate these transactions. We immediately received a flood of orders and before no time there was a shortage of product. To fill this demand, we went to the US to procure product. After a while, we could not procure a sufficient volume of product from US manufacturers so we looked to suppliers in China, Russia and Hungary.

We were able to identify and benefit from these trends because of our “listening” capabilities. We listen carefully to what our customers have to say. People are generally willing to tell you anything you want to know if you show them you are genuinely interested in listening to what they have to say. In return for the information our customers provide us, we offer up information or knowledge that we possess. This usually gets customers to open up about their development and leads to an order for parts they will need to use in their development.

We have employed with this process ever since Kaga Electronics was founded. However, to get customers to place orders and to provide them with beneficial information, it is necessary for us to nurture our own knowledge. We utilize our base in the US to gather information as well as our relationships with Japanese venture companies to pinpoint details on potential upcoming trends. We work together in this manner to help benefit one another.

As the popularity of the Space Invader games began to fade, the age of Nintendo took its place. The Kyoto-based company introduced the Family Computer (Famicom), a home video game console. The game software cartridge used a semiconductor known as a mask ROM. To market these mask ROMs, we approached video game software companies offering to assist with their software development needs if they purchased product from us. We gathered together a team of game software developers both inside and outside the company to support these needs. Mask ROMs sold at an unbelievably fast pace. However, with the advent of the CD-ROM, our game software sales dropped to zero. As times change, it gives way to new trends. Although there is risk involved, Kaga Electronics has been able to sustain its growth by filling demand for popular products while simultaneously developing new markets.

05

We never turn down an employee’s proposal

The Kaga Electronics Group consists of more than 50 companies. We have widely expanded our business domains, which now span from electronic products and semiconductors, to information equipment, EMS, amusement equipment, and sports. We are always searching for new demand. We find our answers by encouraging our employees to take on challenges and to not fear failure. Consequently, we do not turn away new business proposals our employees bring to us. We leave the execution of the proposal up to the employee. People generally develop a sense of responsibility when they have been left in charge of something. It is my opinion that it is important to trust people and that human nature is fundamentally good. In addition, I am of the belief that we do not hire bad people in the first place.

Naturally, not all businesses go well. However, it is important to learn from our failures. Kaga Electronics has put in place a system that gives people a second chance. For example, if an employee fails in properly executing a spin off they proposed, their salary will be cut for six months. However, once this period is over, they are free to take another challenge. A while back, one of our employees set up a company in the US. The company generated profits in the first three years but incurred losses in the fourth and fifth year of operations. The company suffered around 80 million yen in losses. Ultimately the company had to be sold off. The upside of this, having spent many years in the US, that employee became fluent in English and had not problems communicating. In later years, this employee became a manager in charge of technology and was quickly to pinpoint new trends in technology. Even if an employee’s proposal results in a loss of 100 million yen, it is important to us that the employee grows from the experience, and continues to work for us and eventually become a vital asset.

There are a number of employees whose proposals failed but went on to manage one of our group companies. Kaga Sports, which now generates sales of 7 billion yen annually, is an example of a successful project that grew out of a proposal made by one of our employees. If we had a system that did not allow people who had failed to excel, the Kaga Electronics Group would not exist in its current form. Not everyone is extremely talented. I have experienced my own share of failures. However, if we fired people every time they made a mistake, we would no longer have any employees at all.

06

Creating an environment that is easy to work in

Kaga Electronics debuted it shares on the first section of the Tokyo Stock Exchange in 1997. The decision to take the company public was made because we saw it as beneficial for our employees. Allowing employees to execute proposals for establishing a new company or developing a new product require capital. Our major goal for listing our shares was create an environment that would facilitate financing. Consequently, even though I founded Kaga Electronics, I only have a 2% shareholding in the company. In general, the founder of a company tends maintain nearly 50% ownership. However, I believe that the company does not believe to management, it is the property of its employees.

It is often said that “the people make the company.” A company should be a perpetual entity. On the other hand, people are a finite asset. Each generation of employees has to nurture the company into a lasting organization. It is important to figure out how to create an environment that will make this possible. That is why it is my basic stance to never turn down an employee’s proposal and to encourage them to take on challenges. The outcome of this approach has been the diverse expansion of operations and an increase in subsidiaries. We have 50 group companies which means there are 50 presidents. Each company also has its own senior managing directors, directors, general managers, and section chiefs. The bigger the organization the more positions there are. This is positive for our employees as it offers opportunity to move up. I believe that if there are more opportunities for advancement for more people, it will encourage everyone to do their best at all times. Of course our approach also requires money.

07

Kaga Electronics has always been a utility player

Our company started off by selling electronic parts. It basically handled anything and everything related to electronic parts. This has naturally resulted in customers ordering other products from us in addition to ICs. It also prompted us to launch a kit-parts business. Over time our customers have begun discussing the possibility of our assistance in development. We plan to respond to these needs and are currently honing our technological skills and setting up a system both inside and outside the company. Kaga Electronics eventually began to receive orders to handle some processing, after it started delivering kit-parts and helping with development. Ultimately Kaga Electronics has evolved into a trading company that also possesses monozukuri manufacturing functions.

As the times changed, we also began to receive contracts to manufacture finished products, which entailed the expansion of production bases in Asia. We believe focusing our offshore operations in China could pose risks, so we elected to establish bases in Thailand, Malaysia, and Indonesia. Furthermore, our customers now also come to us for assistance in developing sales channels for their finished products. This growth reflects Kaga Electronics stance throughout its history to never refuse the request of a client.

Everything we do is for our customers. We make it our mission to procure products that our customers want. This is also the secret to our success. I have many colleagues and friends at Kaga Electronics. It is time for me to turn over the reins to younger members so that they can carry on our Kaga-ism and continue to embark on new business challenges. I believe Kaga Electronics still has a long future ahead. I look forward to the company’s continued development.

Isao Tsukamoto, Chairman & CEO

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