Kumagai allowed too much breathing space

Japanese construction companies far surpass dotcoms when it comes to cash burn rates.

In the past six months we’ve all become incredibly concerned about the viability of the Asian internet sector. Stories of stellar cash burns have become the fruit of our morning breakfast reading. As an aside, there is one industry that is even more profligate in the cash-pyre stakes – the Japanese construction industry.

I read with some amazement yesterday that the Kumagai group lost $4.18 billion in the six months to September. That amounts to a cash burn of $23 million PER DAY. I don’t know any internet company that can match that.

Then again, Japan is a country that defies economic gravity, so I guess we should not be surprised. And while much of the loss was due to a write down of non-performing assets, the company operates at a big loss – as does virtually all of Japan’s construction industry.

The construction industry is at the heart of Japan’s political patronage system. The fact that this company is still allowed to breathe is a function of the fact that it and other construction companies have been a vital source of funding for the LDP at election times over the years. Banks are too big to fail, and in Japan, so, it seems, are construction companies.

Strange that when we’re asking whether parts of the Korean chaebol should be allowed to fail, we don’t similarly ask whether the chronically inefficient Japanese construction industry shouldn’t be treated in a like manner. But this being Japan, Kumagai Gumi is confident it can get its banks to write off Y450 billion ($4.05 billion) of debts.

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