Lixil’s overseas ambitions hit snag amid accounting probe; Grohe subsidiary Joyou was an important part of the emerging-market strategy laid out by Lixil President Yoshiaki Fujimori

http://asia.nikkei.com/print/article/94375

http://asia.nikkei.com/print/article/94513

May 22, 2015 1:31 am JSTTrouble in China

Lixil’s overseas ambitions hit snag amid accounting probe

TOMOKO WAKASUGI and SO MATSUI, Nikkei staff writers

Grohe subsidiary Joyou was an important part of the emerging-market strategy laid out by Lixil President Yoshiaki Fujimori, right.

TOKYO — Accounting irregularities at a German unit that operates in China pose an unexpected obstacle to Lixil Group President Yoshiaki Fujimori’s efforts to boost the Japanese company’s overseas sales to more than 1 trillion yen ($8.19 billion) by fiscal 2020.

The Tokyo-based company acquired Germany’s Grohe, a maker of high-end faucets used in famous hotels around the world, in 2014, giving it a 72% stake in Grohe subsidiary Joyou. Although Lixil had bought Grohe to gain a foothold in Europe, Joyou, with its roughly 4,000 Chinese stores, was key to Lixil’s emerging-market strategy. It apparently logs annual sales of around 50 billion yen a year.     The trouble began in mid-April, when a Lixil office received a notice from a Chinese bank stating it had not received payment from Joyou. When an investigation turned up possible padding of sales and assets, Lixil sent a special audit team to investigate.

Though the audit is still ongoing, Joyou has apparently lost half of its shareholders’ equity, with its founder among those suspected of fraudulent activity. If the company files for bankruptcy — which Lixil announced Thursday is a possibility — the Japanese company could post losses of 25 billion yen on the value of its Joyou stake and up to 16 billion yen on loan guarantees. Other costs could arise as well, Fujimori said.

Fujimori, formerly of General Electric, became president of Lixil — then JS Group — in August 2011. Yoichiro Ushioda, part of the founding family of JS group predecessor Tostem Group, tasked Fujimori with growing the company by expanding its overseas operations. While growth in the Japanese market is lackluster due to the falling birthrate, the company’s overseas sales came to 40 billion yen in fiscal 2010 — just 3% of the total.

Fujimori made major acquisitions, including U.S. kitchen and bathroom product maker American Standard Brands in 2013 and Grohe in 2014. Combined with the Joyou stake, these gave Lixil a presence in Europe, the U.S. and Asia. The company decided to use the Grohe brand for high-end products, American Standard and Lixil for midrange offerings, and Joyou for lower-end items.

Joyou “is highly cost competitive and was likely seen as the core of [Lixil’s] expansion in Southeast Asia,” said Daisuke Fukushima at Nomura Securities. The losses Lixil could suffer from the accounting problems will not damage its foundations but could delay its emerging-market expansion. The company will urgently need to revise its strategy.

Fujimori had taken pains to integrate the group, including setting up a global management committee and putting top officials from each of his acquisitions in it. But he was still unable to detect the trouble at Joyou, making him acutely aware of the need to further speed up efforts to strengthen governance.

Lixil’s overseas sales probably came to around 400 billion yen last year, still well short of the president’s goal. Fujimori has stressed that the company’s proactive acquisition strategy remains unchanged. He will need to learn from this misstep and refine his methods, particularly risk management.

May 22, 2015 12:18 pm JST

Joyou woes

Lixil unit to file for insolvency in Germany

TOKYO — Japanese housing equipment maker Lixil said Friday that Joyou, a subsidiary listed in Germany, will commence insolvency proceedings.

Joyou, which trades on the Frankfurt Stock Exchange, handles bathroom fixtures in China. Lixil said the proceedings will be conducted through a court in Hamburg, Germany.

In April, an audit of units under Joyou’s umbrella found “substantial deviations” from reported sales and debt figures, according to a news release. Due to an existing problem of “over-indebtedness,” Joyou’s board decided to file with the court.

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