Case 8 Ichizo Kobayashi: A Leader in Urbanization Creates a New Industry

Abstract

This chapter introduces Ichizo Kobayashi, a leader in urbanization and manager of Hankyu Railway, who not only managed the company but also developed suburban residential areas along the railway line and developed the Yurakucho entertainment district by establishing Toho Cinemas.

Urbanization and Electrification Pave the Way for a Mass Consumer Society

As seen, World War I drastically altered the Japanese economy. The biggest change was rapid progress in urbanization and electrification, improving the standard of living and giving rise to a mass consumer society—a growth track ultimately leading to prosperity fully realized after World War II.

The leaders in that transition were Ichizo Kobayashi in urbanization¹ and Yasuzaemon Matsunaga in electrification. Kobayashi, the manager of Hankyu Railway, not only managed the company but also pioneered a new field of urban, tertiary industry by developing suburban residential areas along the railway line; opening department stores at rail terminals; founding the Takarazuka Revue and developing the Yurakucho entertainment district by establishing Toho Cinemas. Matsunaga, who practiced scientific electric power management at Kyushu Electric Railway and Toho Electric Power Company, played a leading role in the creation of Japan’s postwar electricity system with nine major electric power companies featuring private ownership and management. Matsunaga was dubbed the “demon of electric power.”

Housing Shortages in Osaka

Ichizo Kobayashi was born in the town of Nirasaki, Yamanashi Prefecture, in 1873 (Meiji 6). After graduating from Keio Gijuku, Kobayashi joined Mitsui Bank in 1893. He was among those Keio graduates recruited by Hikojiro Nakamigawa to join the Mitsui family business, becoming one of prewar Japan’s leading salaried managers.

After leaving Mitsui Bank in 1907, Ichizo became involved in the establishment of the Minoh-Arima Electric Railway (later known as Hankyu Railway) near Osaka. Urbanization is a business opportunity, first manifesting itself in the electric railway and real estate business (suburban commercial and residential housing). He became a leader of urbanization by linking the two businesses.

Two examples of such interconnectivity come to mind: first, Ichizo’s sale of housing land in the Ikeda-Muromachi residential area along the Minoh-Arima Electric Railway line; second, development of Tamagawadai (Denenchofu) by Denen Toshi Co. that later merged with Meguro-Kamata Electric Railway.

A notable time gap is evident between these two cases of real estate development. Whereas the Ikeda-Muromachi residential area was first put up for sale in 1910, the Denen Toshi Co. was established only in 1918 (Taisho 7). Understanding the origins of a railway company’s involvement in the real estate business, then, entails first studying the case of the Ikeda-Muromachi residential area in Osaka: “In contrast to the relatively small land area of Osaka City, the city’s enormous expansion and the large number of towns and villages in the suburbs led to the early development of suburban transportation systems. Osaka City’s suburban housing was perhaps the earliest to develop in Japan²”—even more than in Tokyo suburbs during the late Meiji to the early Taisho era.

Osaka’s population increased rapidly after the Russo-Japanese War,³ with the rate of increase comparable to that of Tokyo from 1912 to 1917.⁴ As of 1916, however, Osaka, with about two-thirds the population of Tokyo, had less than half its land area. The number of housing units and population per 1000 tsubo (1 tsubo = about 3.3 square meters) of residential land in Osaka (5137 units, 24,384 persons) was higher than those in Tokyo (4833 units, 18,321 persons).⁵ A November 1918 newspaper article illustrates this point: “Generally speaking, rents are much higher in Osaka than in Tokyo. Perhaps Osaka and Kobe are unmatched in the country in terms of high rents.⁶”

From October 30 to November 5, 1918, the Osaka Mainichi Shimbun (Osaka daily newspaper) published a series titled “Osaka in Housing Crisis (1)~(5),” with the following subheadings:

• (1)

• No houses available for rent in Osaka

• The number of vacant houses in the entire city is less than 400

• Even worse, the only available ones are uninhabitable shabby houses

• New construction of merely 1000 or 2000 units will not solve the problem

• Rents are skyrocketing

• (2)

• Price increase of 10–50% in the Chikko area

• Other wards show a similar trend

• (3)

• The high cost of rent in Osaka is unmatched in the country

• The tyranny of housing feudalism

• The small tenants are suffering most

• (4)

• Rent at the outskirts is absurdly high

• The landlords’ personalities are different between the outskirts and the [central] senba district

• (5)

• Housing difficulties for low-wage workers

• Need for public housing, charitable organizations, and public building associations

• Urgent need to install rapid transit trains

Interestingly, the newspaper article concluded: “Citizens will not be spared the misery of housing shortages unless high-speed transportation is established to quickly and inexpensively transport them from the urban center to the relatively remote suburbs,” and emphasized the “urgent need for installation of a high-speed railway.⁷” Clearly, Osaka City’s severe housing shortage fueled demand for new housing in the surrounding suburbs, especially close to the electric railway lines.⁸

In contrast, demand for housing in Tokyo during the 1910s was basically confined to the areas along streetcar lines and provincial rail lines near the urban center. It was not until after the Great Kanto Earthquake of 1923 that the demand for housing spilled over to suburban areas along private railway lines.⁹

Minoh-Arima Electric Railway Enters the Real Estate Business

The Minoh-Arima Electric Railway (MAER), led by managing director Ichizo Kobayashi, was the first case of real estate businesses run by electric railway companies in Japan. This railway company was founded in October 1907, changing its name to Hanshin Express Electric Railway (Hankyu Railway) in February 1918.

The establishment of MAER, with the right to build a railroad connecting Osaka (Umeda), Minoh, Arima, Takarazuka, and Nishinomiya, was thought problematic. There was difficulty in underwriting securities owing to the post-Russo-Japanese recession and a low number of expected passengers given the small population along the rail line. To overcome these challenges, Ichizo Kobayashi, assigned to manage the company, deemed it necessary to combine the railroad business with the housing business along the railroad line. According to Kobayashi’s autobiography, “Itsuo Jijoden” (Itsuo=Kobayashi’s pen name, Jijoden=autobiography) (Sangyo Keizai Shimbun, 1953), his thoughts on the establishment of MAER were as follows:

I just know that it will work out – This company is difficult to set up and has zero credibility. It is expected that the company will be dissolved sooner or later. Even if you manage to devise a way to set up a company, you will be ridiculed by the public along the way as if it will not work in the end. Fortunately, there are many ideal residential areas along the railway line – if one were to buy the most suitable land along the railway line for one yen per tsubo, and one were to buy 500,000 tsubo, one would earn a profit of 2.50 yen per tsubo after opening for business, and one would earn 125,000 yen by selling 50,000 tsubo every six months. Of course, I do not know whether 50,000 tsubo will sell or not, but I think it will be worth about 5 yen per tsubo once the train line opens. I think it would be a good idea to consider such a side business from the onset, to reassure shareholders if the rail business does not pan out (pp. 151–152).

When Ichizo Kobayashi was elected as the managing director of MAER at the company’s inaugural meeting in October 1907, he immediately put the above ideas into action. In a pamphlet entitled “The Most Promising Train” distributed by MAER in October 1908 prior to the railway line’s opening, Kobayashi wrote: “The land to be owned by the company is about 200,000 tsubo in an area with a suitable climate and superb scenery, only 15 to 20 minutes away from Umeda (center of Osaka). The idea is to set up stations here and develop the land to increase the number of passengers along the route, and to profit from the land at the same time.¹⁰” In addition, a pamphlet titled “What kind of land should you choose and what kind of house should you live in? (a guide to residential areas)” published by the company in the fall of 1909, also before the opening of the railway line, includes the following passage:

The beautiful city of water [i.e. Osaka] has vanished as a dream of the past, and you, my unfortunate citizens of Osaka, live in a city of smoke and dark skies! You, who are aware of the [poor] sanitary conditions of the citizens, with a birth rate of 10 [per 1000] and a death rate of over 11, must be horrified by the discomfort of city life, while at the same time longing for the joys of suburban life, rich in pastimes of the countryside. The first requirement for suburban life is convenient transportation. Now that the trains in Osaka City have been opened in all directions, the existing Hanshin and Nankai lines, as well as the Keihan Minoh-Arima line, connect the inside and outside of the city from the east, west, south, and north, and each line has its own special characteristics along its route to satisfy your wishes. At this time, we believe that it is the duty of the Minoh-Arima Railway Company to showcase the scenic homes along its route and present you with a question: “What kind of land should I choose?” We are the only company among all the electric railway companies that owns land in the most suitable location [...] The land owned by the company is more than 86 cho [1 cho is roughly a hectare], and if the price is just over 300,000 yen (excluding the city area), the average price per tan [roughly 100 sq. meters] is only a little over 360 yen per tan.¹¹ If we were to measure this, it would amount to just over 300,000 tsubo, and this area of more than 300,000 tsubo should be left to your choice as an ideal new residential area for suburban life, and it waits for you to move in to turn it into a great paradise. You can see the moon’s shadow in the treetops, and hear plovers calling their friends in the foamy waves off the coast. Therefore, the company will also actively operate a model new residential area, and would like to greatly appeal to the tastes of the citizens of Osaka.¹²

In other words, MAER had acquired a total of approximately 200,000 tsubo of land for residential development along the railroad route by October 1908, and a cumulative total of over 300,000 tsubo by the fall of 1909, before launching the railroad in March 1910.

In June 1910, 3 months after the start of the railway’s operation, the MAER began selling the Ikeda-Muromachi area as the first residential sale of land along the railroad line; the results were favorable.¹³ For this area (total area: 33,020 tsubo), the company established “dozens of streets going north, south, east, and west,” and adopted the format of “one residence, each with a floor space of 20 tsubo or less, is to be built within a lot space of 100 tsubo, and two hundred houses of several dozen types are to be built.¹⁴”

Each house was to have “a large garden,” “electric lighting,” and “adequate sanitary facilities such as ditches and sewers,” while the whole residential area was to have “complete streets with trees planted on both sides” and “a company-operated purchasing cooperative to ensure a low-cost supply of goods.” Also, “A new club was to be built as an entertainment facility, complete with a pool [billiard] hall and other facilities,” “parks and flower gardens were to be established to promote the hobby of horticulture and bonsai, and daily necessities such as barbershops and western-style laundry were to be provided.¹⁵” The sales price per unit in the Ikeda-Muromachi residential area was 2500 yen (including land, house, garden, and facilities), and “the method of sale was an upfront down payment of 50 yen, followed by monthly installments of 24 yen per month for 10 years”.¹⁶

Following the Ikeda-Muromachi residential area, MAER sold the Sakurai residential area (total space: 55,000 tsubo) in June 1911 and the Toyonaka residential area (total space: 50,000 tsubo), also located along the railway line, in August 1914.¹⁷ Thereafter, the company continued to actively promote the sale of residential land along the railway line.

Parenthetically, did Minoh-Arima Electric Railway’s residential land sales generate the kind of profit that Ichizo Kobayashi expected? Regarding the acquisition of land, Kobayashi himself recounts in “Itsuo Jijoden” (Autobiography of Itsuo) that “The standard price for selecting land for residential business, comparable to the lifeblood of this company, was estimated at 1 yen per tsubo, and […] the process went roughly according to budget” (p. 175). This point is consistent with the statement in a MAER pamphlet published in 1909 entitled “What Kind of Land Should You Choose and What Kind of House Should You Live in?” stating that over 300,000 tsubo of land was purchased for over 300,000 yen. On the other hand, there is no reliable historical record that tells how much MAER earned per tsubo from the sale of residential land. However, a newspaper article from September 1913 points out that it was around 2 yen per tsubo.¹⁸ Although unconfirmed, it seems that MAER succeeded in making a profit close to the 2.5 yen per tsubo level Kobayashi initially aimed for through the sale of houses in the early stages of its business. Even though it did not fully reach his target, this success was due to Kobayashi’s purchase of land along the railroad line at a low price prior to the opening of the railroad. In other words, he had already factored in the spillover effect that would materialize over time.

Ichizo Kobayashi’s Entrepreneurial Innovation

MAER became the pioneer in the real estate business among electric railway companies thanks to the entrepreneurial spirit of Ichizo Kobayashi, its senior managing director. He overcame shareholder opposition and pressed ahead with “housing management, the lifeblood of this company.”

He devoted himself to managing MAER’s residential area with two goals in mind:

• 1. Increasing the number of passengers by expanding the number of residents living along the railroad lines, thereby indirectly increasing the profit of the railroad business.

• 2. Factoring in the future spillover effects (by selling the land purchased at a low price before the opening of the railroad at a high price after the railroad opening), so that the company directly benefits from the residential real estate business itself.

Hanshin Electric Railway had already begun to implement the first goal in 1909, earlier than MAER, through its home rental business. However, home rental was unlikely to serve as strong motivation for a railroad company to enter real estate in earnest, since they would have no advantage over other real estate and housing companies starting business along the railway line. Therefore, the ground-breaking nature of Kobayashi’s idea did not stem from Hanshin’s pattern.

Rather, Kobayashi became a trailblazer because he was the first to address the second goal, spillover profit. Subsequently many electric railway companies built or extended lines following Kobayashi’s approach, entering the real estate sector in earnest after factoring in spillover effects. Even in cases where no new railroad lines were built or extended, it was possible to create business opportunities by increasing the number of trains in operation, building new stations, operating express and limited express trains, creating new bus routes linked to trains, and connecting or interconnecting with other railway companies’ lines. Based on these spillover effects, Japan’s electric railway companies increased involvement in the real estate sector, leading to accelerated urbanization in the following years.

As part of such increased urbanization, the Takarazuka Shoka-tai, founded in 1913, developed into the Takarazuka Revue, and in 1932 Kobayashi founded the Tokyo Takarazuka Theater (later known as Toho). In 1927, he became president of Hankyu Railway, and in 1929, he opened Japan’s first rail terminal department store, Hankyu Department Store, in Umeda, Osaka. In addition, as a pioneer in the new urban tertiary industry, Kobayashi assumed a series of key posts: President of Tokyo Electric Light in 1933, Minister of Commerce and Industry in the second Fumimaro Konoe Cabinet in 1940, and after World War II, Minister of State and President of the Sensai-Fukko-in (War Damage Restoration Agency) in the Cabinet of Kijuro Shidehara in 1945. Kobayashi passed away in January 1957.

Kobayashi Also Contributes to Electrification

Thanks to his managerial skills demonstrated at Hankyu Railway, Kobayashi was also called to serve Tokyo Electric Light where he was responsible for restructuring the company’s management, serving as president from November 1933 to March 1940.In the process he became not only a leader in urbanization but also in electrification.

Among the measures he undertook were innovations in sales, displaying his ingenuity. A company history edited by Tokyo Electric Power—“The Kanto Region’s Electric Utility Industry and Tokyo Electric Power—From the Inception of the Electric Utility Industry to the 50th Anniversary of Tokyo Electric Power” (2002)—provides a detailed description of sales innovations that he spearheaded (pp. 438–447):

• 1. Established 17 sales offices in Tokyo (December 1931). He “divided the sales offices jurisdictions into ‘smaller areas, allowing the staff to give customers better service, like true businessmen’.”

• 2. Initiated a cultivation campaign by inspiring a “businessman’s spirit.” “Specifically, to increase the number of lights, brightness, and especially the sale of electrical appliances, with the aim of ‘increasing sales per kilowatt-hour’.”

• 3. Improved customer service. The “hidden and true purpose” of selling heating equipment on the street as part of the demand cultivation campaign referred to earlier was “to foster and inspire a spirit of customer service among the staff.”

• 4. Systematized a fee-related administration. “Unlike the previous ‘spiral collection method,’ in which the company collected fees on days when it was convenient, customers were charged by the same collector at approximately the same time on a fixed date. This instilled a sense of obligation in the company [clients], and the number of customers who paid on the fixed date gradually increased.”

It is noteworthy that Kansai Electric Power’s first president, Shiro Otagaki (president from May 1951 to November 1959), and its second president, Yoshishige Ashihara (president from November 1959 to November 1970), both hailed from Hankyu Railway and trained under the tutelage of Kobayashi. During the reign of presidents Otagaki and Ashihara, nine Japanese electric power companies (Hokkaido Electric Power, Tohoku Electric Power, Tokyo Electric Power, Chubu Electric Power, Hokuriku Electric Power, Kansai Electric Power, Chugoku Electric Power, Shikoku Electric Power, and Kyushu Electric Power) enjoyed a “golden age,” providing a “stable and inexpensive supply of power. Kansai Electric Power stood out among the nine for its corporate vitality.¹⁹” The 1961 commissioning of the Kurobegawa No. 4 power plant, on which the Otagaki and Ashihara duo bet the company’s future, symbolized such vitality. It introduced innovative management unique even among the nine electric power companies during their golden age. This case was an example of multiple top managers in the same human network passing down innovative DNA that advanced corporate management.

In “Fifty Years of Anxiety and Enjoyment: Yoshishige Ashihara’s Retrospection and Vision,” edited by Tsunehiko Yui (Japan Business History Institute, 1978), Ashihara recalls the three-way relationship between himself, Kobayashi, and Otagaki:

Mr Kobayashi taught me many things, but the most important thing was that in business and management it is not enough to look back, you must foresee a little further into the future. Unless you are willing to take risks and decisive action, your business will never prosper. Another thing is that above all else business management must be carried out sensibly. These two were the most important. (p. 31).

Apparently there was little disagreement in the Public Service Committee about making Mr. Otagaki the president of Kansai Electric Power. Nihon Hassoden ²⁰ did recommend Mr. Ikeo,²¹ but his recommendation was not forceful, so the decision was easily made.

However, to tell the truth, we were unsure as to whether Mr. Otagaki would assume the post.²² So Mr. Matsunaga²³ and Mr. Hori²⁴ appealed to Mr. Ichizo Kobayashi. Mr. Otagaki himself said that if Mr. Kobayashi agreed that he should become president, then he would accept, and thus Mr. Otagaki was chosen, is what I’ve heard (p. 80).

The spirit of streamlining is one of the Kobayashi-isms. First, Mr. Otagaki told us not to store unnecessary items in the warehouse. He made us go through the warehouse and if we found anything useless, we had to dispose of it and exchange it for money, no matter how trivial it was. Also, since the collection rate for electricity fees was low, we were told to improve it somehow. In addition, there was a lot of electricity loss, so we were told to lower the loss, and since the thermal efficiency at thermal power plants was poor, we were told to improve the efficiency of the machines. He found various such problems, and since they were technological issues, he told Ashihara to deal with them (p. 92).

Responding to historian Tsunehiko Yui’s question, “I heard that Mr. Otagaki often talked about the importance of timing in decision-making?” Ashihara replied:

We always discussed important matters together, so we were on the same page in everything, but he told me, “Ashihara, no matter what you do, there is always risk, no matter how careful you are in your research and investigation. Therefore, if you have about 80% certainty and the risk is about 20%, the president is responsible for deciding.”... I guess that means managers have to make decisions at 80 percent certainty (p. 95).

Ashihara’s description shows that when both Otagaki and Ashihara took charge of Kansai Electric Power’s operations they applied their Hankyu Railway era mentor Kobayashi’s foundational thinking. This meant taking risks based on foresight and consistently taking a rational approach.