TT-416 -- Lado goes bankrupt

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, April 08, 2007 Issue No. 416

+++ INDEX

- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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+++ WHAT'S NEW

This last week a small but high-profile English school
called Lado International College of Japan declared
bankruptcy in the Tokyo District Court and has subsequently
shut down. Surprisingly, there has been very little
coverage by the foreign press, possibly because of the
sketchy details. The Asahi newspaper quoted Teikoku
Databank as saying that Lado has left debts of somewhere
between JPY3.3bn (US$28.2m), the amount stated on Lado's
December tax filing, and JPY1.8bn (US$15.23m) given in
the bankruptcy declaration.

No reason has been given for Lado's senior management
shutting their doors, but a couple of days before the
bankruptcy declaration, the teacher's union for the
company announced that it had won major concessions about
how staff are treated. The signing of the agreement was
prompted by threatened stike action which would have shut
down the company's 3 main schools.

So did the union break the company? The Lado Union of
Teachers and Staff said that their agreement with
management focused on a "job security pact" that
effectively changed teachers' status from temporary to
permanent. The union said that the agreement was the
first of its kind in the foreign language industry.

While it may have been the first such agreement, it could
well be the last. Given the timing of the union
announcement and the bankruptcy declaration, a mere 2 days
later, the agreement probably was the straw that broke the
camel's back. Thus it was a pyrrhic victory for the
union. While this should not be an indictment of the
union's actions, but it certainly illustrates the
difficulties of teachers and staff getting a fair deal from
intransigent management. Our guess is that things could
have been handled better -- with staff extracting more
management responsibility rather than driving the
incumbents to the brink.

[Continued below...]

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[...Article continues]

While the bankruptcy was self-declared, it doesn't seem to
have been planned. There has been an apparent complete
capitulation by management and a total shutdown of the
school, with around 4,000 paid-up students being affected.
The website is down, and although Lado has said it will
hand off its students to 3 other competing schools, from
various blogs we gather that there is general chaos
surrounding the shut-down and most students don't know what
is going on. Then of course there are the teachers. One of
our tipsters tells us that they have not been paid and may
not be.

As we said at the start of this year, the Lado bankruptcy
is just the tip of the iceberg surrounding problems in the
English teaching world here in Japan. Barely a week goes by
that there isn't some school somewhere that isn't on the
losing end of a court battle. Just last week, Nova lost a
case revolving around their penalty system for students who
buy bulk lessons then seek to terminate early.

The problem, clearly, is that the English-language learning
market is mature and dominated by a few major players
crowding out innovators and fresh business methods.
Marketing-spend defines success in the market and smaller
firms are unable to get access to capital needed to
compete. Rumor has it that Lado overspent on its Spiderman
commercial and this was the main cause of it running out of
cash. This, coupled with archiac management practices is
crippling an industry that should be enjoying a
rennaissance.

There are very few challengers -- Gaba, despite its
short-comings, being one -- you can read more about their
IPO in December in Terrie's Take 401. They got into the
game through a management buy-out and brought in a
significant amount of new investment cash -- probably
around JPY4bn (our guess, based on their issuing
JPY3.2bn to Daiwa Securities prior to the IPO) from
NIF-SMBC then Daiwa. With this cash, they intelligently
sought to not only do a lot more advertising, but also to
improve the quality of their teaching materials and their
interaction with teachers.

The success of Gaba going public, their stock has only
dropped 15% since listing, is being watched by others (whom
we can't name at present). We believe that the best
opportunities for further IPOs lie with the smaller
companies who have been growing organically (out of
profits) so far, and who will follow the Gaba management
footsteps and go get private equity to "push" the business
harder. Meantime, following the rules of nature, we expect
that there will be further bankruptcies or restructurings
amongst the larger, older players. We are aware of several
well-known brand names in trouble and without the will of
senior management to make changes, are not likely to last
the distance.

Will the Lado bankruptcy depress the language market in
Japan? Will students lose faith in schools and find other
ways to learn? We don't think so. In fact, the improving
economy and trickle-down of the surplus to ordinary
consumers will probably cause a resurgence of people
wanting to learn English, especially now that more M&A is
taking place between Japanese and foreign firms. There are
already more than 1m people working for foreign firms, and
the bulk of these are in high-end sectors (banking,
insurance, software, real estate, hospitality, and
international logistics) where the jobs are desirable and
it is clear that you can't rise above a certain level of
seniority without being able to interact with the
international side of the business.

Lastly, the Lado news brings us to a comment on how we
produce Terrie's Take. We received a tip at the start of
the year that they were in trouble, and that tip led us to
do our analysis of the Gaba IPO and the industry in
general. Of course, a tip does not comprise a guarantee of
accuracy, and so we decided to not name Lado as the
catch-sales organization we spoke of in the article. You'll
recall that "catch-sales" is a very productive but
emotionally abusive method of selling to vulnerable members
of the public. In Lado's case, we were told that they
bought black market lists of single and divorced women,
aged 30-40, and set their 200 sales staff, who were 100%
sales commission based, on to those lists.

Given this background, perhaps this is one bankruptcy that
is not to be mourned...

...The information janitors/

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+++ NEWS

- Magnetic refrigeration boosts H2 productivity
- Aeon has record profit and revenue
- JTB poll gives popular travel destinations
- Another Ishihara landslide
- Youtube videos breach election law

-> Magnetic refrigeration boosts H2 productivity

A Tohoku University study has found that using rare earth
magnetic refrigeration can be used to efficiently produce
liquid hydrogen. Using a gadolinium-gallium-garnet magnetic
body, the researchers were able to achieve liquefaction
efficiencies of over 50%, compared with the average 20% to
40% efficiency rates achievable through standard
compression techniques. ***Ed: We have said before that
Japan has the capacity to become the world's new energy
suppliers within this century. The nation's trading houses
are focused on liquid gases of various types and already
control a vast distribution network. Now all they need is
a production source.** (Source: TT commentary from
h2daily.com, Mar 16, 2007)

http://tinyurl.com/2ghxzv
Or, http://www.liveurl.org/index.php?4kPBL86ayJ

-> Aeon has record profit and revenue

Aeon announced this week that the group operating profit
and revenue for fiscal 2007, through to February 2007, rose
to an all-time high for the company. Consolidated operating
profit was up 14.2% to JPY189.73bn, and sales were up 8.9%
on JPY4.82trn. ***Ed: Aeon is aiming to become a global
supermarket powerhouse similar to Walmart. The company was
galvanized into action -- meaning embarking on aggressive
M&A -- after Walmart bought into Seiyu in 2002. Just like
Japan's auto manufacturers, this is one company worth
watching over the next few years.** (Source: TT commentary
from freshplaza.com, Apr 5, 2007)

http://www.freshplaza.com/2007/0405/ec_jp_aeon.html

-> JTB poll gives popular travel destinations

A recent JTB poll has found that more than half of retiring
Japanese baby boomers have either taken or plan to take an
overseas trip to mark their retirement. The destinations in
order of preference were: Europe, 30.8%; Hawaii, 12.5%;
Australia/New Zealand, 10.6%; SE Asia, 5.2%; North America,
4.5%; and Mainland China, 3.4%. ***Ed: Obviously the
promise of dankai generation cash being recirculated
through the economy is becoming a reality. 7m people taking
trips, buying new cars, and moving house is going to be a
great boost to consumer spending.** (Source: TT commentary
from honoluluadvertiser.com, Apr 5, 2007)

http://the.honoluluadvertiser.com/article/2007/Apr/05/br/br8291754306.html

-> Another Ishihara landslide

In case you didn't catch the news yet, incumbent Tokyo
Governor Shintaro Ishihara just won a third term, winning
1m more votes than the runner-up, Asano. Ishihara is 74
years old, but is still going strong. Despite charges of
cronyism and some fudged projects, such as the debt-ridden
Shinginko Bank, he was able to come up with some
last-minute social welfare reforms that appealed to voters
and turned the tide in his favor. Voter turnout was 54.35%,
10% up from the previous election. Tokyo proper has a
population of 12.7m (all 5 cities comprising Greater Tokyo
have a population of 35m). (Source: TT commentary from
nikkei.co.jp, Apr 8, 2007)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20070408D08JF996.htm

-> Youtube videos breach election law

What happens when control over the local media is
subverted? You get political candidate videos posted to
YouTube, in contravention of but impervious to Japanese
laws on unfair campaigning. This just happened in the
Tokyo metropolitan elections, where earlier TV comments by
one of the more radical candidates appeared on the service.
The election management committee asked YouTube to delete
the video. ***Ed: We think that Japan's rules on limiting
electioneering are a noble ideal but in practice are also
very impractical. While it is reasonable to want all
candidates to get equal broadcast coverage, in effect this
means that the advantage is always with the encumbent. A
person like Ishihara knows how to manipulate the media so
well, that without breaching any rules, he can be on TV
most nights. It's no wonder that voters really only know
and feel comfortable with him. While no one wants money
politics, the existing system is also quite unfair.**
(Source: TT commentary from nikkei.co.jp, Apr 6, 2007)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20070405D05JF885.htm

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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+++ CANDIDATE ROUND UP/VACANCIES

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+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors@terrie.com.

-> No comments or feedback this week.

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Newsletter:

Comments

The "catch-sales" of Labo and Nova trying to lock people into prepaid lessons is typical of English schools in Japan. In fact I am sure that most English teachers in Japan do not believe that their students will ever become fluent in English. The only real way to learn a language is to go to that country and "live" the language. My two cents...

It's ridiculous to say that the agreement between Lado management and the Lado branch union broke the company or drove it to the brink. After all, the labor management agreement was only in force two days, but the huge debt run up by Lado management was years in the making. Indeed, the teachers only began to take action after management was late with salaries. Furthermore, it's clear from the timing of the bankruptcy declaration that Lado management had no intention, from the beginning, of ever honoring its agreement with the teachers.

Terrie here:

Yes, I agree that it was not the union's fault that Lado fell over and died. However, the point to be made is that the union win probably was the straw that broke the camel's back. Where there's smoke there's fire, and the timing on this one is just too close to be a coincidence.

While it is no doubt the job of the union to win better conditions for its employees, there comes a point where if the company can't survive, what is better? Winning on principle and being out of a job after the company goes under, or improving the business by continuing negotiations with the management?

Indeed, we are now seeing the exact same scenario unfolding with Nova. Is it right for Nova to mistreat its employees? Absolutely not, but at the same time, for thousands of English teachers to lose their jobs if it turns out that the Nova lawsuit loss causes the company to die, this doesn't seem to be in the best interests of the teachers. It's not like there are plenty of other healthy schools left -- in fact the entire industry is in trouble and almost every school is taking short-cuts.

As an industry, English-teaching in Japan is due for some turbulent water, and if I was an English teacher for a major chain school right now, and I felt like I wanted to form a union to prove a point, I'd rather save my energy and go find a job in some other industry where the pay and respect is better.

GABA is no different than other "cath-sales" eikaiwa and is perhaps worse. For all its vaunted investment in materials, GABA teachers are on fake "service provider" contracts so GABA can evade its responsibility to give paid sick days and holidays and to avoid paying unemployment insurance. Also, GABA teachers make less than 1,500 yen an hour. What kind of quality is that?

It's all about Ukraine English teaching quality no doubt...

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