Case 5 Yataro Iwasaki and Yanosuke Iwasaki: Formation of Zaibatsu by Owner Managers

Abstract

This chapter introduces Yataro Iwasaki, the founder of Mitsubishi and a representative example of an owner-manager who promoted industrialization in the Meiji period.

Brief Biography of Yataro Iwasaki

If Hikojiro Nakamigawa of Mitsui is a typical example of a salaried manager, Yataro Iwasaki, the founder of Mitsubishi, can be called a representative example of an owner-manager. A brief biography of Yataro follows.

Yataro Iwasaki was born in 1835 (Tempo 5) in Aki County, Tosa Province (today’s Aki City, Kochi Prefecture), as the eldest son of Yajiro Iwasaki, a samurai of low status. Yataro served as a low-ranking official of the Tosa Domain, traveling on business to Nagasaki and taking part in the feudal lord’s visits to Edo, but his failure to adhere to rules led to dismissal from both duties. However, Yataro gradually began to demonstrate his business acumen, becoming a prominent figure in the Tosa Domain. His turnaround is attributed to an assignment with the Nagasaki branch of the Tosa Commerce Association (Nagasaki Tosa Shokai), part of Kaiseikan, an organization of the Tosa Domain. Business historian Ryoichi Miwa states:

Yataro’s fortune changed for the better when he was assigned to the Nagasaki Tosa Shokai in Keio 3 (1867). Tosa Shokai’s business was to sell Tosa’s regional products and purchase arms and ships, and Yataro, as chief of the Tosa Shokai, met with foreign merchants and gained valuable experience in business transactions.¹

Thereafter,

Yataro moved from Nagasaki to the Osaka branch of Tosa Shokai, where he was promoted to junior advisor for the Tosa Domain after he skillfully managed the financing and purchase of steamers. Due to the Meiji government’s prohibition on feudal clan-based businesses and also to the austerity policies of the Tosa Domain, plans were made to spin off the Osaka Tosa Shokai and to reorganize it as the Tosa Kaisei Shosha, and in Meiji 3 [1870], it was authorized by the trade authorities as the Tsukumo Shokai. ²

The Tsukumo Shokai became completely independent of Tosa Domain with the abolition of the feudal domain system in 1871 and changed its name to the Mitsukawa Shokai in 1872. Yataro reorganized the Mitsukawa Shokai into the Mitsubishi Shokai in 1873, becoming president.

Business historian Yasuaki Nagasawa describes the activities of Mitsubishi Shokai:

Mitsubishi Shokai was a diversified company engaged in shipping, mining, coal mining, camphor manufacturing, and silk spinning. Of these businesses, shipping was the most successful. At the time, the Japanese government ordered Mitsui and other major merchants to establish the Japan Post Steamship Company, with the aim of protecting coastal shipping routes from foreign steamship companies. However, Japan Post Steamship was inefficient and poorly managed, and even lost out to Mitsubishi Shokai, only had a few steamers at the time. So, the government’s plan was unlikely to succeed. In addition, the Japan Mail Steamship Company was even involved in a scandal for its refusal to provide military transport for the Japanese invasion of Taiwan in Meiji 7 [1874]. Mitsubishi Shokai, however, boldly agreed to provide military transportation at the request of the government. Consequently the government decided to make Mitsubishi Shokai a protected company and issued the “First Order” in the following year, Meiji 8. The order granted Mitsubishi a total of 31 steamers, including 13 government-owned vessels and 18 steamships owned by the Japan Post Steamship Company, free of charge, as well as an annual subsidy of 250,000 yen for operating expenses. Mitsubishi’s shipping division was renamed the Mitsubishi Mail Steamship Company [MMSC] and became the largest monopolistic and privileged shipping company in Japan.³

With the support of the government and led by Yataro Iwasaki, MMSC boldly challenged the foreign steamship companies that dominated the shipping routes around Japan at the time. First, the company pioneered the Shanghai route, challenging and triumphing over the U.S. Pacific Steamship Company. Furthermore, Mitsubishi also triumphed over the British P&O (Peninsular and Oriental) Steam Navigation Company on the Shanghai route and on the Tokyo-Osaka route.

However, Yataro’s reliance on government support, left the business on a shaky foundation. Historian Yasuaki Nagasawa notes:

The so-called “political merchant” path of business, in which businesses closely cooperate with the government, can provide a hefty source of income, but it is also very risky. Mitsubishi, too, was unable to enjoy the benefits for long. They ended when the Political Upheaval of Meiji 14 [1881] swept the government, and Shigenobu Okuma, who had been Mitsubishi’s backer, was ousted from the government. The Satcho government [consisting largely of former samurais hailing from feudal domains of Satsuma and Choshu], saw that behind Okuma were Yukichi Fukuzawa in literary circles and Yataro Iwasaki in business fields; they considered the three men an alliance. Thus, in a dramatic turn of events, [the government] began to exert pressure on Mitsubishi. ⁴

In 1882, the government turned against Mitsubishi, establishing Kyodo Unyu Kaisha (KUK) as a rival to MMSC with the help of the Mitsuis and Eiichi Shibusawa. Competition between KUK and MMSC was fierce, gradually exhausting both companies and driving them near, and it was becoming likely that both would collapse. In later years, Yataro Iwasaki and Eiichi Shibusawa were often considered to be rivals,⁵ and this fierce competition between the two companies was behind such a view. Due to tough competition, both MMSC and KUK faced a serious financial crises. Yataro Iwasaki fell ill and died in 1885.

Brief Biography of Yanosuke Iwasaki

After Yataro Iwasaki’s death, his younger brother, Yanosuke, succeeded him as president of MMSC. Yanosuke Iwasaki was born in 1851 (Kaei 4) in Aki County, Tosa Province, as the second son of Yajiro Iwasaki—16 years after Yataro’s birth.

Yanosuke attended Chidokan, a school run by the Tosa Domain, and was taught by Yasutsugu Shigeno at a private school before studying abroad in New York in 1872 (Meiji 5). The following year he returned to Japan and joined his elder brother Yataro’s company, by then renamed Mitsubishi Shokai, becoming its vice president. In 1885 Yanosuke became the second head of the Mitsubishis when his older brother passed away.⁶

The historian Yasuaki Nagasawa provides an analysis of Yanosuke’s ascent as the second president:

Being the second generation puts the person in a delicate position. The first generation can freely run the business, and both failure and success are of their own making. By contrast, the second generation may increase the inheritance, but is not allowed to shrink it. Business, however, is fraught with risk, and ventures with great profit potential also carry great risk of failure. On the other hand, if the company maintains only safe businesses, profits will be low and the company will not be able to achieve significant growth; worse, the company may decline. In short, a second-generation chief will oscillate between aggressive and passive options when it comes to decision-making. Yanosuke must also have experienced this state of mind, complicating any evaluation of his performance. If we emphasize the passive aspect, Yanosuke was a defender, a man who ran the business inherited from Yataro on the track laid down by Yataro. If we emphasize the aggressive aspect, he was a fortifier who developed his own course of business based on the foundation of Yataro’s legacy. Actually, he seems to have had both aspects, and cannot be painted in a single color. When evaluating Yanosuke’s activities, we must consider both of these aspects.⁷

As the “defender,” Yanosuke can evinced an ability to end the ruinous competition between MMSC and KUK. There was a fear that if the competition produced a quagmire sinking both companies, foreign steamship companies would step into the vacuum and increase their presence around Japan’s coastal waters. Concerned about such a prospect, the Japanese government decided to merge MMSC and KUK, forming a new company. Yanosuke accepted this new policy and dissolved MMSC in September 1886. In October of the following year, the new company Nippon Yusen Kabushiki Kaisha (NYK Line) was established, taking over the operations and assets of the two.

Yanosuke had to make the difficult decision to withdraw Mitsubishi from the shipping business, a decision that might not have been possible if Yataro had been alive. For Yataro, the shipping business was precious. However, thanks to the decisions of Yanosuke, Yataro’s heir, Mitsubishi was able to overcome a major crisis. In this sense, Yanosuke was a “defender.”

The dissolution of MMSC allowed Mitsubishi to make a fresh start outside of the shipping transportation business and began to aggressively pursue a diversification strategy. Yanosuke’s character as a “man who fortified the foundation” was fully demonstrated from then on.

Mitsubishi’s entry into the shipbuilding industry was an important milestone in the company’s full-fledged diversification of its business. In 1884, Mitsubishi leased the government-run Nagasaki Shipyard. As historian Nagasawa explains: “At that time, Kyodo Unyu and Mitsubishi were in the midst of fierce competition, and it was strange for the government to lease the Nagasaki Shipyard to Mitsubishi, a competitor company. While the circumstances surrounding this are unknown, one theory is that the government was trying to weaken Mitsubishi by handing to Mitsubishi them, the deficit-ridden Nagasaki Shipyard and Machinery Works [NSMW], thereby indirectly helping Kyodo Unyu.”

Mitsubishi acquired ownership of the government-run NSMW in 1887 and Yanosuke devoted himself to the restructuring of the shipyard. He invested in a major facility expansion and appointed his trusted subordinate, Heigoro Shoda, as manager of the Nagasaki Shipyard.

Under the leadership of Yanosuke, the NSMW was able to rebuild its business and continued to grow. The construction in 1896 of the 6000-ton class ocean cruiser, the Hitachimaru, was a symbolic event.

Mitsubishi’s Nagasaki Shipyard became the foundation of today’s Mitsubishi Heavy Industries, with Mitsubishi Electric Corporation and Mitsubishi Motors Industries born as spin-offs from the shipbuilding business. Yanosuke’s decision to withdraw from the shipping transport industry and enter the shipbuilding business was the starting point for Mitsubishi group’s overall diversification.

Yanosuke’s diversification effort did not stop there. In the coal mining and metal mining industries, he greatly expanded the scale of operations that had begun during Yataro’s reign. Mitsubishi’s coal mining business had essentially begun with the acquisition of the Takashima Coal Mine in 1881, and Yanosuke worked hard to expand the mine’s operations. In 1889, he acquired the Shinnyu-Namazuta Coal Mine and expanded into the Chikuho coal field. In the metal mining business, Yanosuke worked to strengthen the management of the Yoshioka Mine that had been shaky during Yataro’s time. In addition, Yanosuke also acquired and developed metal mines throughout Japan, including the Osarizawa Mine, Makimine Mine, Omodani Mine, Ikuno Mine, and Arakawa Mine.

A notable examples of Yanosuke’s Mitsubishi business diversification was his foray into the real estate business, reportedly begun at the suggestion of Heigoro Shoda who was sent on a business trip to London. This trip culminated in the development of the “1-cho London” office complex in the Marunouchi district of Tokyo—the beginning of today’s Mitsubishi Estate Co., Ltd.

Thus, Yanosuke Iwasaki, the second generation, played a leading role in the diversification of the Mitsubishi zaibatsu’s businesses. His appellation as the “man who fortified the foundation” is certainly fitting.

In 1893, Yanosuke dissolved Mitsubishi Company and reorganized it as Mitsubishi Goshi Kaisha and handed over the presidency to Hisaya, Yataro’s eldest son. After passing the reins to Hisaya, Yanosuke remained involved in Mitsubishi’s management and, until his death in 1908, continued to assist his nephew in further diversifying the company’s business.⁸

Breaking Away from Political Powers

In the discussion of Hikojiro Nakamigawa and Mitsui in Case 4, three requirements are mentioned for zaibatsu formation: (1) to break away from political powers; (2) to appoint salaried managers; and (3) to promote industrialization. These three requirements also apply to the establishment of the Mitsubishi zaibatsu.

First, it was significant that Yanosuke Iwasaki, who became the second head of the company after the death of Yataro Iwasaki, transferred the business and assets of Postal Steamship Mitsubishi Company, which had been growing rapidly with government backing, to NYK and thereby withdrew from the marine transport business. In this regard, Yasuaki Nagasawa writes:

When valuing the assets to be transferred, Mitsubishi had revalued its depreciated vessels and other assets, so it had not lost any money. Moreover, many of the steamers transferred were old vessels. NYK sold 16 underperforming vessels during the first seven years after its establishment, necessitating a capital reduction from 11 million yen to 8.8 million yen. In other words, Yanosuke succeeded in selling the shipping business at a higher price. Furthermore, the government guaranteed an 8% annual dividend from NYK, whose largest shareholder was the Iwasaki family. In the end, Yanosuke protected the Iwasaki family’s assets while cleaning up its close ties with the government. Compared to Mitsui’s departure from being a political merchant that required the disposal of bad debts and other significant expenditures, Yanosuke’s actions were comparable to ignoring flowers and just taking the fruit. ⁹

By withdrawing from the shipping business, Mitsubishi was able to break away from depending on political powers. This was an essential path for Mitsubishi’s rebirth as a modern zaibatsu.

Appointment of Salaried Managers

Mitsubishi also aggressively recruited and actively hired salaried managers. It was notable that Yataro and Yanosuke, the owner-managers, took a proactive stance in their hiring.

Table 1, prepared by historian Hidemasa Morikawa, covers the salaried managers active in the Mitsubishi zaibatsu during the Meiji period. ¹⁰ This table includes those who were educated at Terakoya (temple schools) of the Edo period and secondary educational institutions and therefore defines salaried managers rather broadly. Borrowing the term coined by Yukichi Fukuzawa, Morikawa replaces the term salaried managers with “samurai scholars”,¹¹ stating that “the active hiring of a large number of ‘samurai scholars’ ahead of others (Mitsubishi in the Meiji 10s [1877–] and Mitsui in the Meiji 20s [1887–]) and their placement in key policy-making positions, created important conditions for their development as major zaibatsu.” ¹²

Table 1 Salaried managers active in Mitsubishi Zaibatsu during the Meiji Era

Noteworthy here is that Morikawa dates the active hiring of “samurai scholars” to the Meiji 10s [1877–] for Mitsubishi and the Meiji 20s [1887–] for Mitsui. Thus, Morikawa contends that Mitsubishi was one step ahead of Mitsui in terms of hiring salaried managers. This lead was possible because the two owner managers, Yataro the founder, and Yanosuke his successor, were enthusiastic about hiring salaried managers from the very early days of Mitsubishi.

Several salaried managers who joined Mitsubishi at that time are not included in Table 1. For example, Eiji Asabuki (later, Chairman of Oji Paper Co., Ltd.), and Tatsuo Yamamoto (later, Governor of the Bank of Japan), who were both Keio Gijuku graduates, as well as Takaaki Kato (later, prime minister) and Hakaru Isono (later, founder of Meidi-ya), both The University of Tokyo graduates.

Promotion of Industrialization

Finally, as noted, the promotion of industrialization constituted the third condition for a zaibatsu’s establishment. In the case of Mitsubishi, too, salaried managers played an important role in industrializing.

Heigoro Shoda is a representative example of a salaried manager who led industrialization effort at Mitsubishi. Historian Shigeaki Yasuoka explains:

Heigoro Shoda is credited with turning the Nagasaki Shipyard into a shipyard “on par with those of developed countries” and making it the foundation of Mitsubishi’s heavy industry.

Shoda studied at Keio Gijuku, where he was highly regarded by Yukichi Fukuzawa, and was even under consideration as potential head of Keio after Fukuzawa’s death. In Meiji 29 [1896], when the Navigation Promotion Law and the Shipbuilding Promotion Law were promulgated, Shoda who was then the chief executive of Mitsubishi, secured an order from NYK to build world-class steamers and began modernizing the Nagasaki Shipyard and Machinery Works. Although supporters of the coal mining industry, Mitsubishi’s core business at the time, had opposed to investing the profits in shipbuilding, Shoda moved to Nagasaki to lead the shipyard between Meiji 30 and Meiji 34, directing operations, and he succeeded in building the 600-ton Hitachi-maru. In Meiji 38 under his leadership, the Kobe Shipyard was completed under his leadership. Shoda’s activities became the foundation for later aircraft, automobile, and electric machinery manufacturing. In addition, Shoda contributed to the establishment of the Meiji Life Insurance Company and Sanyo Railway Company. The Marunouchi district of the Mitsubishi Estate was originally state-owned land, but Mitsubishi President Yanosuke Iwasaki obtained its lease at the suggestion of Shoda who was in England. As chief executive, he [Shoda] was in charge of most of the management of Mitsubishi Goshi Kaisha (established in Meiji 26); he retired in Meiji 43.¹³

This positive assessment of Shoda is widely shared among business historians. Morikawa, for example, has also taken up Hikojiro Nakamigawa of Mitsui and Heigoro Shoda of Mitsubishi as representative of salaried managers who promoted industrialization.¹⁴