A member of the founding family of Seiko holding
We, the defacto team, reach all of our readers with a fresh interview with Junichi Hattori, a member of the founding family of Seiko Holding, and the largest shareholder of Khan bank, the largest commercial bank of Mongolia. In this interview, he talked about his businesses in Mongolia and acquisition process of Khan bank.
Jargalsaikhan Dambadarjaa: Please tell us about you and your connection to Mongolia?
Junichi Hattori: I came here 4 years ago for the first time. My friend Reiko Okano san and I came as tourists. Before that, I studied geopolitics for a few years and read a lot of material and became interested in it. I have found that Japan is unique, and it is not getting along with all the surrounding countries very well. Relation with China is delicate, South Korea – is delicate, North Korea – is hostile, now Russia – is hostile. Somehow, we survived for the last 60-70 years because of a Military Treaty with the United States. I think, that is the only way we could survive safely in this environment. But now it is time to think about what to do by ourselves as a country. In that concept, Mongolia is very attractive for Japan.
J: For us, Japan is attractive too.
H: Because it is on the north side of China and in front of Russia. We have a long history of a good relationship between Mongolia and Japan.
J: It has been already 50 years since Mongolia and Japan have established a diplomatic relationship.
H: Mongolia also has a very good relationship with both countries, Russia and China.
J: You graduated from Stanford University, California. I was there last year for an international conference. Also 20 years ago, I went there to listen to Dalai Lama’s speech. Now, I do interviews with many guests and meet interesting people, like you. Please tell us about your connection with Seiko. Who founded the company? And who is running it?
H: My great great grandfather founded the Seiko watch shop in Ginza in 1881. I’m the fourth generation.
J: Did he open it as a shop for watches, was it only for the Seiko watch?
H: At that time, it was a small shop, selling imported watches and clocks because there was no manufacturing of watches in Japan at that time. They imported watches and clocks from Switzerland. After some years, they started manufacturing it by themselves.
J: But now you have the best watches. Probably, Number 1 or Number 2 in the world.
H: It is now Number 1 in the world as a matter of production of quality watches because there are many manufacturing companies based in Hong Kong, selling very cheap electronics, for $10 a piece. We have a lot of products priced above $100-300.
J: What is the secret for keeping that name for many years in such a competitive market?
H: We started with manufacturing clocks. Then we started producing watches just after WW2, I think. The difference between a Swiss and a Japanese watch at that time was that we have an integrated manufacturing system unlike a Swiss company, which consists of many suppliers of parts, such as base plate, gears, spring and assembling services and cases from all different companies. But our system is all integrated.
J: You mean, you do everything by yourself.
H: Yes, as far as the mechanical movement is concerned. This helps us to improve the quality. We do quality control (QC) and manage to mass produce high-quality watches. We were the first to introduce practical quartz watches on a mass production basis. The reason we could do this is the integrated system. We manufacture all the parts and run the entire manufacturing system by ourselves. In watch industry, for many parts manufacturers, it is not easy to introduce an electronic system because it is risky and may cost jobs. We have highly skilled professionals in the chain and we could convert some process into electronics work.
J: Who is now running the company?
H: My family, my younger brother.
J: How do you become an investor? You shifted yourself into finance. Please, tell us about it.
H: I have originally been working as the group company chair, not only for the watch company but also for the electronic parts. We are selling all parts to mobile phone manufactures. We produce semi-conductors, LCD panels, batteries, and all parts. We also manufacture watches, which makes up less than 20 percent of the business. I do not like to talk about the details, but there were problems in the family. Some family members were not interested in electronics and wanted to focus only on watches. So, I decided to leave the company.
My investment in Mongolia was a coincidence because of my studies in geopolitics. I was interested in Mongolia as a country, and I came here. Many people approached me presenting investment opportunities for many businesses. Among those businesses, I am somehow interested in acid spar-fluorspar because this is the material, an essential part of a semi-conductor. Because of my experience in parts and semi-conductors, I became interested in these materials.
J: By fluorspar reserves in the world, China is number one, Mexico – number two and Mongolia is number three. I am also familiar with fluorspar deposits, reserves in Mongolia, and have visited plants that are producing concentrates, including the one in Mexico. The process is the same across the countries. They float the particles, then wipe away the cream on top.
When will you produce fluorspar in Berkh mine, Mongolia, that you are investing in now?
H: Some Mongolian people approached me that they have and will develop mines. They took me to Delgerkhaan site, and I found that the site was excavated for many years by Russians and then they just left after the USSR fell apart.
J: How deep are those mines?
H: I never went down there.
J: Is it an open pit?
H: No. There were some holes and tunnels. Probably, not very deep, maybe, less than 10 meters. I am not quite sure, though.
J: Then, there must have been artisanal miners, they dig holes by themselves by hand. The main deposits were developed by Russians. That Berkh mine might be owned by some Mongolian family. You now bought a part of it?
H: Yes, because there is the evidence of excavation. I’m not quite sure that we could still develop this fluorspar. But it is a lemon of the mining business, I think, there is a sign of higher probability of mining. So, I have decided to invest in it.
J: How about your other business in Mongolia. You have bought share of the largest bank in Mongolia, the Khan Bank. What percentage of shares do you own?
H: It was around 60 percent. Now, 55.3 percent because we sold some shares to the Khan Bank employees.
J: It belonged to Sawada san.
H: Sawada san invested in it a long time ago. Sawada san is an entrepreneur. He started and invested in many businesses. But his main business is H.I.S., a travel company. He is trying to retire and is thinking of giving this business to his son. But then, he came to the idea of selling those other businesses and concentrating on H.I.S. And he was trying to sell the shares of Sawada Holdings. At that time, there were many other buyers. All of a sudden, he was in a very difficult position due to the corona virus pandemic. His travel business is in a very difficult environment now. He has to concentrate on H.I.S. now. So, he sold the other businesses.
J: You changed the name Sawada Holdings to S.H. What percentage of Sawada Holdings did you buy?
H: Almost 43 percent as per yesterday (22.08.04) at Tokyo stock exchange and together with other friendly groups, we control the majority.
J: You have spent 22 billion yen from your family investment to buy them?
H: I am not directly buying H.S. Holdings; I buy through a limited partnership managed by Meta Capital. Meta Capital is investing and buying those shares.
J: Meta Capital initiated a tender offer for Sawada Holdings. There is a name of Upsilon Investment Limited Partnership. Where did this name come from?
H: I am not quite sure. Upsilon is a company that manages the partnerships of Meta Capital.
J: Are you a board of member of H.S.? Are you a managing director?
H: Yes, the managing director, but not the CEO.
J: There is a scandal here in Mongolia, concerning the transfer of the shares of Khan Bank. According to our law, one should disclose how the shares are sold and who is involved. There was a conflict: the Ex-Finance Minister was saying one thing and the President of Mongol Bank was saying something different. Do you know about that?
H: Yes, we have a lot of talks and exchange of documents between the Central Bank of Mongolia. Because the Central Bank has consented that this acquisition is legitimate according to the laws. Since Sawada san has not really agreed to sell until the Central Bank admits those transactions as legal. And so that TOB has not been successful because it has been more than one year, and it has never been accepted by the Central Bank. At that time, I gave up. After some months, the Central Bank approved everything, those transactions. And Sawada san agreed to sell the shares.
J: I understood that the Central Bank of Mongolia agreed to the transaction to Upsilon. The legal owner of Khan bank is now Upsilon, right?
H: Yes, 55 percent. We got an approval last July, 2021 and then an official letter came from the Central Bank, this May, 2022, saying that we are the legitimate owner.
J: Can I have a copy of the letter?
H: I’m not quite sure. I did not see it. Meta Capital managed everything. I can ask them.
J: Here, it is still causing some issues. It is required by our law, that banks have to issue IPO’s this year. I do not know what percent, but they have to issue IPO’s this year. Next year, it is required by law that banks should have at least five owners, which means that you have to sell some shares, too. How would you do that? Would that happen here or in Japan?
H: We have not decided yet. But we are talking to the Central Bank here and we are already approved to go public. There are some processes on variations of all the owners of the company. The variations are inside (among) the Khan Bank first before we officially go public.
J: Have you got Khan Bank’s value (estimation) already?
H: We are now starting that process.
J: Do you make it by yourself or are you asking someone to do that?
H: We are asking PwC to conduct an Asset Quality Review.
J: Do you make it in cooperation with your Mongolian partners or are you doing it separately?
H: I think that it is separate. I am not quite sure. But we got an approval from the Central Bank to start it.
J: You, 55 percent of Upsilon, got approved by the Central Bank to do an independent an AQR?
H: Yes, to prepare to go public.
J: Have you met your Mongolian shareholders, the 40 percent owners of the bank?
H: No, never. I understand that there are some litigations from the other owners against the Central Bank.
J: That is the reason why you have not met your Mongolian owners (partners-shareholders). Once the litigations are resolved, would you meet the Mongolian partners?
H: We may do. If the Central Bank agrees, we could get together.
J: Delicate situation. According to the law, you must sell some shares this year. How would you do this? Will you sell some of your shares? 40 percent or so should be sold. What is your position on that?
H: Well, we are preparing to go public. The Central Bank requires that each owner should have less than 20 percent of the bank before the end of 2023.
J: IPO will start this year and you will sell more than half of your shares. What is your understanding? Will you sell it in the Mongolian market or in the Japanese one?
H: We have not decided yet. Because in my thinking, it is natural and the right thing that eventually major bank shareholders are Mongolian people, but not under special forces. Many diversified shareholders are essential for the stable management of banking. Banking is the center of the monetary policy of the country. This is important to the Government policy.
J: The operation of the banks should be transparent. That is the assurance of the banking quality and assurance towards their clients.
H: My concern is that if we go public at this point, anybody can buy it on the market. It is easy to buy all the shares. Some special groups can buy the majority after going public. This regulation said that one owner’s holdings should be less than 20 percent. But it is not really safe because multiple related companies or persons can buy it.
J: Our law specifically says that the final owners cannot be connected (related persons) and the government will make sure that it is not the case. That is why they will ask to see your transactions, to check whether they are connected or not.
H: But it is not easy to find out.
J: Of course.
H: It is very difficult. It is the same thing in Japan. There are a lot of regulations to eliminate shadow owners.
J: In the process of buying shares from Sawada san, have you met any other Mongolian investors who are interested in working with you?
H: Not yet. Nobody has approached me.
J: You do not know any Mongolians through Upsilon?
H: No because all management of shares is controlled by the general partner, not by me.
J: Who is the general partner?
H: Upsilon because I invested in buying the shares through Meta Capital, which is managed by Upsilon. That is why I am not a Board Member of Khan Bank.
J: That is the reason you have not met the Mongolian owner because they have a litigation at the Central Bank. What is that litigation about?
H: I am not quite sure. There is some news that the litigation against the Central Bank is about the process of some approval. Under the Mongolian law, they say any contact should go through the commercial bank itself, however, since we were approved directly by the Central Bank, other shareholders are complaining. I know about it only news, though, and I am not sure.
J: The key here is that Mongolian people should understand clearly. It is very important. One thing, is it legal or not? The other thing is that the Mongolian public wants to know about the Japanese buyer and the largest share owner of our largest bank. That is why it is a key for us to receive that permission from the Central Bank. It should be public information. You can ask Upsilon and other people for a copy of the letter. If you could send me a copy of the letter that would settle many doubts in Mongolia. If that letter remains as undisclosed to the public, then there will be many doubts.
H: I will ask them. They might need an approval from the Central Bank to release that information publicly.
J: If the Central Bank refuses to disclose that approval letter, I will ask them directly why they are not disclosing that information to the public. This is one reason for all these doubts because it is the largest bank of the country, where 2.2 million people out of the 3.4 million population bank with. These people really want to make sure that their money is safe. Instead of Sawada san, we now see you as the largest owner of our largest bank.
That is the reason that we are interviewing you to introduce you. You are a wealthy man, with a long history in business. In that sense, we talked about your Seiko history. In the same way, we also want you to ask a copy of that letter.
H: I am really contributing to the Mongolian economy through my investment. My major business is fluorspar, not banking.
J: Still, you are the largest share owner of the largest bank and our people are very serious to get to know you, your intentions with the bank.
H: That is why I am very positive to go public to sell the shares to Mongolian people and diversify the owners.
J: Sounds well. We want to see your fluorspar business moving. You will export fluoride acid and will compete with China. It will make life easier for many businesses in Taiwan, Japan and Korea, as it is used for some parts of electric vehicles.
H: Because, we have almost no mineral resources in Japan. There is no domestic mining industry in Japan. So, we rely on imports. Mongolia has a lot of underground assets. Thus, it is a very good partnership.
J: I think, when you start to produce fluorspar in Mongolia, you will use the best technology and train people. There are many other deposits in Mongolia.
H: We would like to invite many investors from Japan.
J: That is also what we want to see. At the beginning of our interview, you said that Japan has a problematic relationship with its surrounding countries.
H: Yes, it is risky.
J: Mongolia and Japan have a good relationship and that relationship should be growing and bringing more investment and more business.
H: I hope that we develop our relationship for a long time.
J: Are there any other things that you would like to tell Mongolians?
H: There will be some TV program shootings in here. It is a very popular program in Japan. The previous series of the program will be on TV in Mongolia this year.
J: What is the name of the program?
H: Hanzawa Naoki. Probably, this year, the program would be released with Mongolian translations. Subtitle is now being produced here.
J: What does the name mean?
H: It is the name of the person in the banking business. It is a very banking scandal and is a funny and interesting story. The new series of drama will be produced in Mongolia.
J: Is it happening between Mongolians and Japanese?
H: Yes. If broadcasted in Japan, then many people would come to Mongolia.
J: How long will you stay in Mongolia?
H: Leaving on the 5th and coming back in October. I come here 4-5 times a year.
J: Our interview will be published in English, Mongolian, Russian, and Japanese in our Defacto Gazette soon. Thank you very much Hattori San.