The Journal The Authority on Global Business in Japan

The Cyberdyne Hybrid Assistive Limb (HAL)

The Cyberdyne Hybrid Assistive Limb (HAL)

Cyberdyne, a Japanese robotics maker that over the years has become a media darling, this summer found itself on the receiving end of brutal language from companies questioning its public and financial statements.

Well Investments Research was one of the first to question the company’s claims. “[Cyberdyne’s] current valuations on an earnings basis are potentially the highest we’ve seen since the Internet bubble burst in Japan in 2000. The valuations may make you think Cyberdyne is about to become the next big thing. The reality is, the company’s never made a profit. It is not present in the world’s biggest market for wearable robots and deliberately eschews the lucrative military sales on ethical grounds. Its products are not covered by insurance in the US, and in Japan coverage is extremely limited.”

Next came Citron Research, which released a report in August that grabs attention with its headline, “Cyberdyne is the most ridiculously priced stock in the world.”

The problem, for Well Investments and Citron, is that Cyberdyne has been all talk and no action. In fact, a June 2015 request for an interview with the company’s founder, Dr. Yoshiyuki Sankai by The Journal was turned down by Cyberdyne, which said its device, the Hybrid Assistive Limb (HAL)—the world’s first cyborg-type robot that allows a wearer’s bodily functions to be improved—“will launch it in [the] US market in the very near future.” A year later, an interview request was turned down in an almost identical fashion. And a US launch remains elusive.

For its part, Cyberdyne believes the short-selling issue, which has seen the company’s stock plummet from ¥2,600 on May 31 to around ¥1,600 today, is based on a misunderstanding. Citron sees the stock eventually falling to ¥300.

What has happened to Cyberdyne would perhaps have been unimaginable a few years ago. International companies are looking through financial reports for discrepancies, missed problems, and plain old gobbledygook that could fool investors and lead to inflated share prices. Some of their clients then use this knowledge to make bets on declines in stock prices, cashing in once the firms go public with their information. This is not “the Japanese way.”

Toward the end of last year, Well Investments was first to make public a report that targeted Marubeni for misstating earnings. This was followed in spring by a report on the company Jigsaw, which accused it of being “a high-tech forgery,” which is little more than “a small server monitoring and maintenance company,” despite grandiose claims of tie-ups with some of the giants of the technology industry. According to Bloomberg, shares in the three companies had declined an average 35 percent by the middle of September.

“In our three reports, first the companies attack us as an entity,” says Yuki Arai, the Hong Kong-based lawyer that founded Well Investments. Arai has other business interests unrelated to the companies he targets and is, to all intents and purposes, running a one-man operation. “What [the targeted companies] need to do is counter-argue and explain to investors [why our claims are incorrect].”

Cyberdyne chose to attack. “We have even received comment that this may be a scheme backed by clients such as short-selling funds or activists who have commissioned the analysis,” the company wrote in an email to The Journal just after the Well Investments report was released in July.

“Their report has had no influence on Cyberdyne’s stock value today, and does not merit any comment. The report is based on a comparison with other robots that have completely different principles of motion and purpose of use, and suggests a lack of understanding of Cyberdyne’s technologies and potential.”

The Hybrid Assistive Limb (HAL) assists physically challenged people, allowing them to move more easily.

The Hybrid Assistive Limb (HAL) assists physically challenged people, allowing them to move more easily.

Arai says his clients include short sellers. “We provide our reports to clients in advance of their release.” He also said Cyberdyne was cynical in calling out his “misunderstanding” of their technology. “Not all investors understand the technology in detail,” he countered. He said that he had conducted thorough research on the company using publicly available information, as most investors have to do before choosing where to place their cash. “If they feel I am not knowledgeable about the technology, then that is their fault.”

Cyberdyne eventually granted The Journal an interview with Shinji Uga, its chief financial officer. He argued that the faint neurological signals that HAL picks up and uses—to move the device, which helps the brain’s “muscles” get stronger and patients recover from injuries faster—separates their technology from that of competitors, which creates movement with the primary aim of increasing mobility. “HAL is a device for treatment, not transport,” Uga insisted.

“Our business is not focused on selling devices, but on collecting data throughout society to help advance healthcare,” he said. “We are heading into a field that is new, and does not have a lot of regulations.” That, he says, has led to delays in getting technology to the market, as healthcare regulators have, in many countries, proved unable to keep up with innovations that could change lives.

“The HAL device that we have, and others that we have made public, probably constitute about 10 percent of the technologies we are developing,” Uga said. “We are eventually expecting a valuation of around ¥4 trillion.” In October, the company was valued at ¥221 billion.

Uga said that most investors in the company were institutional, and in it for the long haul. Whether those investors choose to stay, put pressure on the company, or pull out is likely to define Cyberdyne’s future.

The problem for Cyberdyne is one that is shared by many companies in Japan. Communications departments tend to be weak. Akira Kiyota, CEO of the Japan Exchange Group, which runs the Tokyo Stock Exchange, earlier this year called short sellers “ethically questionable.” Many see things differently.

“There is not a lot of pressure from shareholders on management to explain what they are doing,” stated Rupert Sutton, a consultant and director working in the fast-moving consumer goods sector with companies such as Weben Asia Ltd. and Exigo Marketing Pte. Ltd. He pointed to incidents such as Calbee’s recent foray into China, which saw the company’s venture there achieve 3 percent of its sales target before being sold on after three years. “The coverage was minimal in the press and probably at the shareholder meetings nobody will ask questions,” Sutton said.

Dentsu is another case in point. This year, it has been implicated in scandals involving suspicious payments made in the buildup to Tokyo’s winning bid for the Olympic Games, and overcharging a multitude of companies for online promotion. It has also been accused of working a member of staff to death.

For Sutton, these scandals are part of a larger problem for Japan. Shareholders are quiet, but so are the media. “If the Dentsu overcharging scandal hadn’t been published overseas (Australia-based AdNews got the scoop) I don’t think anybody would have been any wiser,” he said. “Publishing that [in Japan] would have been rocking the boat, and [Japanese media] do not like to have the boat rocked.”

Major incidents have attracted serious attention. Over the past few years, Takata airbags have exploded, Toyota brakes have failed, Tepco nuclear reactors have melted down, and GS Yuasa batteries have burned in Boeing Dreamliners. But there are also minor incidents, and bookkeeping issues that have, in part, led to the rise of the short sellers.

GS Yuasa batteries have burned in Boeing Dreamliners.

GS Yuasa batteries have burned in Boeing Dreamliners.

A major issue is the reluctance of Japanese companies to meet international standards and become more intertwined with the global economy, Sutton said. Effectively, “the Japanese way” is leading to more sympathetic treatment of management and less competitiveness.

“If there was greater openness from management, more international staff, more joint ventures, and more willingness to transfer knowledge, we might see progress,” he added. “But we are talking about generational change here. Companies are top-heavy, delegation is not encouraged, and autonomy is not given, so business becomes very slow.”

The criticisms are not unknown to Japan’s elites. Traditionally, the issues have been shrugged off, and discussion of them has been considered taboo. But that changed when Prime Minister Shinzo Abe came to power, promising to get the economy back on a growth track. His government saw corporate governance as a way of helping companies improve their behaviors and make Japan a more international place for doing business.

By September, nearly all listed companies had brought outside directors on board and a new stewardship code had been adopted by more than 200 institutional investors. “I have stressed many times that corporate governance reform is at the top of my agenda,” Abe said in New York last year.

“It is too early to make a decisive evaluation, but so far, from an investor’s perspective, the stewardship code is far from sufficient,” Arai of Well Investments told The Journal. “Institutional investors need to be more aggressive, and we need to see people such as Daniel Loeb [founder of hedge fund Third Point LLC] become more engaged in the Japanese market. I expect there will be more lawsuits, so management will begin to feel more concerned about what it is doing.”

Short sellers are seen, by people such as Japan Exchange Group’s Kiyota, as cynics looking to make a fast buck by exploiting weaknesses in companies that could be internally resolved. Critics say that all the employees of these companies are put at risk by short-sellers’ reports in favor of allowing the wealthiest in society to make easy money.

But to their advocates, short sellers play an important role in the economy, weeding out the negligent, inefficient and untruthful. This makes for a more efficient economy, increases accountability and, in the end, is a social good. At base, short sellers see themselves as mopping up the problems that corporate governance may miss.

In that way, Abe has helped make the case for the short seller to come to Japan. Arai says Abe’s economic plans helped him decide to launch Well Investments. “If there had been no Abenomics,” he said, “I may not have started Well Investments. But in general, favorable winds are blowing, so . . .”

As for governance and stewardship, last year The Journal spoke with Nicholas Benes, representative director of the Board Director Training Institute of Japan, who said the Government Pension Investment Fund needed to take the lead in stewardship for reforms to really take hold. A year on, the fund has revealed its individual investments. Based on the most recent figures, it held 59,300 shares in Cyberdyne.

Richard Smart has been living and writing in Japan since 2002.
The problem for Cyberdyne is one that is shared by many companies in Japan. Communications departments tend to be weak.