じてんしゃそうぎょう (jitensha sogyou)

* “J-WOTD” = “Japanese Word of the Day”

I’m surprised that there hasn’t been more focus by the media on what Nova really was. Nothing more than a long lived Ponzi Scheme.

I guess for the foreign press it is easier to win over readers with a sob story about how many gaijin will be fired/evicted due to the mess that Nova is today. What is most amazing about this scandal is how quickly it has snuck upon us. Only three years ago Nova’s share price was trading above 600 yen (this week it is closer to 16 yen!). Why did the proverbial $hit hit the fan so quickly? Because Nova was a house of cards.

But not just any old house of cards, the cunningness of Nova’s ability to finance its future from its cash flow of today would have even surprised Baldrick. The beauty of the pre-payment system meant that Nova would receive an entire year (and sometimes more) of cash before the student had even begun her lessons. While any respectable company would use the cash carefully, a Ponzi scheme is all about growing that cash. Spending it today (ads, new schools openings, new teacher hires, celebrity bunnies, you name it) so that you will hopefully sign up more students (read “free cash”) in the future.

It’s alright while you are growing. The faster you are growing, the more students sign up, the more cash they pay you in advance, the more you can finance the growth of your empire. But this can get really dangerous if you don’t realise that you are borrowing from tomorrow to finance today. The moment the growth stops, the cash stops coming in and you have no way of paying your bills. You start to realise that you can’t even afford to pay your teacher’s salaries. The momentum disappears almost immediately and you come to a grinding – and ugly – halt.

Clearly the Japanese (except for the poor OLs who signed up for Nova) have seen a few of these scams in the past. So many in fact that they have a word for it. 自転車操業 (jitensha sogyo, running your company like you would a bike).

The example of a bicycle is perfect. Think about it for a moment, the faster you pedal, the faster you move, the more momentum you pick up. Things are great – they’re fun even. And then you run our of steam (not even Lance Armstrong can ride a bike forever). The moment you stop pedalling, your momentum disappears and you start to slow down. Eventually your wheels stop spinning and your bike falls over. Not only a halt but potentially a painful one. Nova was the best example of a jitensha sogyo Japan has seen in a long time.

Example of usage is found in real life HERE:

英会話学校の経営は前払いの受講料を教室数の拡大に充てる自転車操業が大半
“The vast majority of English Conversation Schools run their business like a bicycle by funding their expansion with the prepaid lesson fees from their students”

Nova Sagi? Bleak skies ahead for Japan’s Nova Usagi

Japan’s largest English Language conversation school, Nova is the second largest employer of foreigners in Japan (the first being the Japanese government, bless them) employing over 4,500 teachers nationwide. The company name NOVA, originates from the English word for a star that suddenly becomes thousands of times brighter and then gradually fades to its original intensity (or to nothing in this case!). It has however, been made into a now familiar acronym by its eikaiwa (英会話) senseis, who proclaim to be heavily overworked, and given little or next to NO VAcation.

Last Friday (26th October 2007), Nova filed for court protection from creditors, and also temporarily closed all of its 1000+ English conversation schools. It is hard to imagine any other event which could cause as much disrupt to the “Eigoken” foreign population in Japan, short of war or Government meltdown. On Thursday 25th, a finance deal with two foreign funds to save the company in its current form fell through, and in the wee hours of the 26th, the three remaining board members fired the founder and CEO Nozomu Sahashi (猿橋 望), who was absent from the meeting and did not even have the offer of a chance to put in a word of defense for himself.

It has been a rocket ride for Sahashi. He studied aboard in both France and Denmark when he was young, but was overcome by the sadness he felt about not being able to communicate with the locals. Upon returning to Japan, he decided that he didn’t want foreigners to have the same feelings of solitude in Japan, and so in 1990, with two Canadian and Swedish friends he created Nova. 17 years later, as of March 2007, Nova boasted over 1000 schools nationwide and over 500,000 students, which is more than half the entire English teaching market in Japan. In 1995, Nova’s sales were as high as 75 billion yen. CEO Sahashi had changed his name from Saruhashi thanks to the ribbing from diligent kanji studying foreign teachers who relentlessly called him Monkey-Bridge, or just MB. However the company had listed in 1996, he made Japan’s top 100 tax-payers list in 1997 paying over 900 million yen in tax, and Japan’s population was becoming more adept (theoretically at least) at the English language. Not bad for a shy young lad from Kishiwada, the heart of Osaka’s underworld.

Sahashi (MB) Nozomu, The (ex)CEO of Nova
at a June press conference

However at the beginning of 2007, it all started to come crashing down. The company’s business model had relied on selling bulk lessons to students up front, which they could then attend over time. This meant that they had lots of cash coming in, and could finance its rapid expansion, which meant opening almost one school a day during 2005 and 2006. The catalyst for the down spiral however, was a lawsuit from a student who claimed that Nova refused to refund prepayments for lessons that he no longer wanted to take. After a court battle, the Supreme court threw out an appeal by Nova, demanding the repayments to be made. After this began and in early 2007, the media was all over Nova, for all the wrong reasons. First, in January, seven Nova teachers were caught in possession of cocaine. In February, Nova was raided by METI and the police over the refund issue. And then in late March, one of their teachers, a cute Brit was murdered.

With the Japanese school year beginning in April, the first 3 months are vital to Nova sales. However with all the bad PR and the ongoing lawsuits, the number of new contracts dropped and cancellations increased dramatically. With less prepayments for lessons coming in, and more prepayment refunds going out, the cash stopped flowing in, and Nova started to become late on payments. Then in June, METI (経済産業省, Ministry of Economy, Trade and Industry) banned the company from selling any contracts longer than a one year term. After Nova became officially guilty of illegal business practices, Sahashi held a press conference and apologized, but didn’t take responsibility and resign. Also bowing in apology next to Sahashi was his Assistant CEO Shouichi Watanabe.

Here is the NHK news clip (Japanese) in full for some (mi-ni-yo-ku-tsku) revision:

Click here to view the embedded video.

Article 24 of the Labor Standards Law (労働基準法２４条) stipulates that companies must pay wages to employees at least once a month, on a fixed date. In July however, Nova began delaying (by weeks, and in some cases months) payments of salaries and stopped paying office rents. Since September, many schools have been shut down because the firm was unable to secure native English-language teachers, all of which lead to the events of last week.

This business and social disaster has been coming for months, and Sahashi and his aides have been courting potential suitors to takeover the company (and all its problems), but to no avail. The most speculation was around a potential takeover by HIS (Japan’s largest travel agency). Rumour has it that Sahashi pushed too hard of a bargain, and HIS gave up in disgust.

In the end, the building list of creditors, the unknown total liability of the prepayments, and the possibility of underworld connections to the business all contributed to the result of not being able to seduce a suitor. However, with still over 50% of the English language market, some superb school locations, and the mass of students, Nova still has many attractive points. Therefore, now that the company has filed for protection from creditors, the race is on for potential acquirers . Names thrown about so far have included Rakuten, Aeon, and of course now that Sahashi is gone, HIS has come back on the scene. All will likely be revealed in the next few days.

Nova teachers rally outside the Osaka labor standards office
last Tuesday – The signs read, “Sahashi, pay us our money!”

Despite Nova’s largest office being in Tokyo (Shinjuku), the 55 year old, single Sahashi has always spent most of his time in Osaka (Shinsaibashi), where its modest headquarters are located. In past months, he has been said to have been passing the lonely evenings in the local izakayas, slowly drinking his favourite shochus, and desperate for a compassionate ear and new ideas on how he could save his crumbling empire. There have been concerns voiced as to his will to save the company as he has remained mostly hidden from the public and many of his aides, communicating with the staff only through intermittent faxes. That this culminated with him not even attending his own board meeting where he was fired may not come as a surprise to some. However Sahashi has always been said to have a very good heart, and we believe that he has been doing his utmost right up until the end.

The potential fallout from Nova’s implosion cannot yet to be gauged. However it has already begun to cause huge unrest in the foreign community. Nova teachers are represented by a labor union called the General Union, whose homepage is covered with articles and “emergency advice” for its distraught members. It is not only the senseis who should be worried though, 4,500 foreigners suddenly appearing on the local job markets may have repercussions for many people already working here. As well as that for many of the teachers who are in Japan on working holidays straight out of school, without pay checks, how will they survive? The Australian and British Embassies have already begun to offer assistance to teachers who have not received salaries, but there are limits on what they can do, as it is a domestic employment issue.

QANTAS is offering discounted airfares to sacked Nova teachers for the next few days if they want to go home to Australia, as 20% of Nova teachers are Aussies. The Australian Embassy’s website posts detailed info for Nova refugees as follows:

Following discussions with the Australian Government, Qantas has advised that for a limited period it will be offering a reduced air-fare rate for Australian NOVA employees who wish to return to Australia. Enquiries (including about conditions and availability) should be directed to the Qantas Tokyo office on (03) 3593 7000.

For further ongoing information on the demise of Nova, stick with us here at Stippy. There are also a number of other sites providing ongoing coverage of this, including:

Let’s Japan, Japan Today, Japan Economy News, and of course Metropolis.