Tuesday, July 27, 2010

Brewing in Japan: Interview with Bryan Baird of Baird Beer

Earlier this month during a trip to Japan, I traveled to the coastal city of Numazu to visit Baird Brewing Company, one of the country's most innovative new craft breweries. When I arrived, I had the fortune to meet Bryan and Sayuri Baird, who founded the brewery in 2000. Bryan answered some questions about brewing in Japan:

After graduating from Johns Hopkins SAIS, what inspired you to get into the brewing business and why Japan?

I attended SAIS in the Japan Studies program and enrolled with the full intent of returning to Japan in some professional capacity upon graduation. My first job was with the Tokyo office of the American Electronics Association. Craft beer, or ji-biiru as it was called, was receiving great attention in Japan at the time because it was a brand new thing—small-scale brewing was made possible with deregulation that happened during the Hosokawa government in which minimum production requirements necessary for a brewing license were lowered dramatically from 2000 kl per year to 60 kl. I didn't love working as a sarariman (salary man); I always had been a passionate beer drinker; and I respected Japanese society for the reverence it paid to craftsmanship. Therefore, I felt that craft beer was an industry that suited both me and Japan.

Why did you choose to locate your brewery in the city of Numazu?

After attending brewing school in California, my first industry job with a brewing equipment company brought me to Numazu. Our ultimate dream, of course, was to launch our own craft brewing company. For a variety of reasons, we judged Numazu to be a very good place to inaugurate a craft beer business. We thus stayed and here we still are today.

How did your initial brewing learning process take place?

The first thing I did, and the smartest, was to immediately enroll in brewing school. I attended the American Brewers Guild's 3-month intensive brewing science and engineering program, which also combined with a practical apprenticeship. My apprenticeship was done at the Redhook Brewery in Seattle. I thus had very good initial training. Being a good brewer, though, is very much dependent on the interplay of theoretical knowledge and practical experience. To gain more practical experience I cobbled together a tiny brewing system out of re-welded used kegs, set it up on our veranda and began brewing pilot batch after pilot batch. This was the actual system with which we launched our original brewery-pub. It was so tiny (30-liter batches) that I had to brew with great frequency and this helped me to accrue invaluable experience in a very short time.

Who were your inspirations?

My greatest business inspiration is Warren Buffet. The principles and values he espouses I embrace wholeheartedly.

Which breweries do you admire most?

Fritz Maytag of Anchor Brewing in San Francisco (although he just recently sold the business) and Ken Grossman of Sierre Nevada Brewing in Chico, California are probably my two biggest industry heroes. Some of my favorite breweries now include Russian River, Firestone Walker, and Victory. Piece Brewery and Pizzeria in Chicago and the Pelican Pub & Brewery in Oregon are two outstanding brewery-pubs.

What is your beer's concept?

With each and every Baird Beer we seek to craft a full-flavored beer of character. We define character simply: Character is the interplay of balance and complexity. Industrial beer tends to be well balanced (i.e. it can be drunk in quantity without inducing palate fatigue) but fully lacking in complexity (i.e. the flavor is one-dimensional and you pretty much know everything about the beer upon the first sip). Poorly made craft beer tends to be complex but it lacks balance. Great craft beer possesses both. For us, the key to achieving this character is minimal processing. Therefore, we begin by selecting ingredients that are minimally processed (e.g. traditional floor-malted barley, whole flower hops, fresh whole fruit, etc.). Then, we strive to brew with these ingredients in as simple and unprocessed a way as possible (e.g. we do not filter Baird Beer and we secondarily ferment and naturally carbonate it in the package from which it will be dispensed—much like Champagne).

How is the beer Japanese?

We enjoy lovely soft water in Numazu that really contributes a round and balanced house character to our beers. In the Japanese esthetic, harmonious balance is greatly prized. I think Baird Beer is a liquid embodiment of that Japanese esthetic value.

What were some of the initial challenges you overcame as a microbrewer in Japan?

Japanese ji-biiru (craft beer) boomed out of the gate in 1994 but was already turning into a bust by the time we were getting into it around 1997. There was, and still is, simply too much bad craft beer in Japan and not enough really good stuff. Thus, we had to overcome the largely negative image that the industry garnered for itself in its initial years. The other major challenge was simply that we were brewing a kind of beer that had never really existed in Japan before and people really didn't know what to make of it and us. The key to growing sales in a nascent market like craft beer in Japan is, in addition to great product, constant consumer education. The more that consumers understand about beer and about how and why we approach it the way we do, the more open they are to the experience. This sort of education, though, takes time and requires persistence.

Is it easier for a foreigner to introduce a revolutionary product like microbrewery beer to Japan?

That's a good question. My answer is yes, so long as it is the right foreigner. By "right" I mean someone who comprehensively understands Japan, who can deal with Japanese people with cultural, social and lingustic understanding, and who genuinely likes and respects Japan. This is the type of foreigner that places like Johns Hopkins SAIS help to nurture. When you are this type of foreigner you get to participate in Japanese society on a deep and meaningful level but without having to face the same sort and degree of social and cultural constrictions that the Japanese themselves must often deal with. This kind of social liberation can be turned into a very valuable business asset.

How did your business start to take off?

The initial turning point for our business happened 2–3 years into it when we realized there was a definite market for what we were brewing, only it wasn't in Numazu but rather in Tokyo. This led us to purchase larger brewing equipment and begin bottling and kegging our beer for distribution in the Tokyo market. The more we sold in Tokyo, the more frequently Tokyo beer enthusiasts would make the pilgrimage to our pub in Numazu. This eventually led us to open pubs in Tokyo itself. By doing well in Tokyo and selling throughout Japan, the local market then began to wake up. Finally, ten years into it, we seem to have gained real traction and achieved that magical sort of critical mass. Our three gold medals in the 2010 World Beer Cup certainly didn't hurt things either.

What is the current state of the Japanese big beer and microbrewery market?

The big industrial brewers in Japan are in for some dark years, I am afraid. The simple fact is the overall Japan beer market is shrinking. This is because the population is both aging and not growing. As one gets older, one drinks less. I would not want to be an industrial brewer in Japan. As for craft beer in Japan, there are still way too many sub-par players. These poor performers need to be weeded out and this is happening gradually.

What do you see for the future of beer in Japan?

For good Japan craft brewers, as well as importers of excellent world craft beers, I believe the future is bright. People seem to be wanting more quality if not more quantity, and there seems to be at least a partial movement away from purely mass-produced and mass-marketed goods to premium niche goods crafted by shokunin (artisans). Currently in Japan, craft beer does not account for even 1 percent of the overall beer market. U.S. craft beer, on the other hand, accounts for more than 4 percent of the U.S. market by volume and more than 7 percent by dollar. I can see Japan craft beer achieving similar numbers in the Japan beer market within the next 10–20 years.

What advice do you have for aspiring entrepreneurs in Japan?

My advice is quite simple: Possess abundant reserves of passion, persistence, perseverance, integrity, and guts. Also, possessing sufficient "Japan skill" is critical to succeeding in business in Japan. Frankly, these Japan skills take longer and are harder to acquire than most industry-specific skills. Most foreign business people who do not do well here fail because of insufficiency on the Japan skill front.

Wednesday, July 14, 2010

Will a Rudderless Japan Drift into Crisis?

Japan Needs a Captain

The upper house election in Japan last Sunday dealt a huge blow to the ruling Democratic Party of Japan (DPJ), leaving the country with a "twisted" parliament and no clear path forward. In contrast to the previous decades of nearly uninterrupted single-party rule, the new, messier political environment is a positive sign for Japanese democracy.

But this difficult transition to a new mode of governing comes at a time when strong leadership is needed to address a possible sovereign debt crisis that could hit within five years. Ironically, the DPJ's defeat last Sunday was partly the result of Prime Minister Naoto Kan's flip-flopping over a consumption tax that was meant to help stave off any problems emanating from its exceptionally large debt-to-GDP ratio (near 200 percent). Most voters support the tax but the prime minister buckled under criticism on the issue, fostering the impression that he is simply an opportunist. The party's loss may have made prospects for reform "an uphill battle."

I had the chance to talk with people from media, politics, government, business, and academia in Japan during the week leading up to election day. Consistent with the polls, many of the people I spoke with were undecided about which party to support, and the murky election result may delay financial reforms. Rating agencies Standard & Poor's and Fitch have warned of possible credit rating downgrades due to Japan's expected political gridlock, which may hinder the country's ability to reign in its sovereign debt.

Hatoyama's Parting Gift

Yet there is good news. While the lower house election last August was a rejection of the long-ruling Liberal Democratic Party (LDP), last week's upper house election was about real issues while also serving as a referendum on the DPJ's 10 months in power. A political monopoly has been replaced by a period of what Japan expert Gerald Curtis calls political "creative destruction." One DPJ staffer told me that the current, more pluralistic public debate over policy issues was the legacy of former Prime Minister Yukio Hatoyama.

Whether or not by design, the two administrations of Kan and Hatoyama have put on the table thorny issues, including the logistical details and strategic importance of the U.S.-Japan alliance and the previously unpopular idea of a consumption tax, which led to the downfall of the Ryutaro Hashimoto administration more than ten years ago. I was told the DPJ expression for this expanded public square is "the new public."

Meanwhile, the new smaller parties actually stand for something other than an unbridled thirst for power. In particular, Your Party, analogous perhaps to American libertarians, seeks an inflation target and to shrink the government thus unleashing Japan's entrepreneurial spirit and creating jobs. Your Party did quite well, gaining ten seats. It appeals to a common frustration in Japan with government in general and is populated with stars from Tully's Coffee Japan, JP Morgan Chase, and the Ministry of Economy, Trade and Industry (METI).

The outcome is a real multi-party system. But contrary to hollow calls for a revolution last fall, this is the new reality: the slow democratic politics of compromise.

Drifting into Troubled Waters?

Nevertheless, the slowness of Japan's new politics could launch the country adrift into a debt crisis. Although 95 percent of Japanese government bonds are held by domestic investors, several factors could create risks. First, with Japan's low savings ratio and low economic growth, if its aging population starts to draw on its savings, the government may be forced to rely on foreign funders who will demand higher interest rates. Second, a deteriorating Japanese current account, due to a stronger yen or weaker global demand for Japanese products, would also reduce a source of debt funding. Reuters has quoted one analyst as predicting a current account deficit by 2016. Finally, it isn't clear whether a consumption tax would generate enough revenue or whether the tax would only dampen an already stagnant economy.

But whatever happens, five to ten years seems to be the critical time horizon. The next lower house election will take place in 2013 and by 2015 Japan is expected to shift toward external funding of its debt and will therefore face higher interest rates.

"Three to four years from now I expect a sovereign debt crisis to hit Japan and long-term interest rates to surge," former Bank of Japan board member Teizo Taya said in a May interview with Reuters. Taya also believes that the five percent foreign holdings of Japanese debt would be sufficient to trigger a crisis if there were a sell off.

One government official echoed these views when I visited Tokyo last week, saying the current account was the figure to watch. But interestingly he said that while some had hoped the election of the DPJ would have provided the "shock" to the Japanese system to bring about economic reform, the DPJ's failures over money scandals, mishandling the U.S. alliance, and the consumption tax have killed that hope. Instead, he and his colleagues are looking to a debt crisis to provide the necessary shock for economic reform. Changes could occur in Japan's tax structure (reducing corporate taxes and increasing consumption taxes over time) as well as in its industrial policy to spur growth. Can't change occur without the need for a crisis?

"The Deadlocked Japanese Economy"

Underneath the sovereign debt risk is an economy that is in irons. Just as its political system faces drift, so does Japan's economy, according to a METI report released last month.

METI minister Masayuki Naoshima puts it this way last month when he unveiled his ministry's new industrial vision: "Some people say that the Japanese economy is recovering from the economic and financial crisis triggered by the Lehman Shock the year before last. However, in reality, many Japanese people probably find no improvement in the sense of stagnation they feel in their everyday lives. They even seem unable to see any new light for the future. I believe the reason for this lies in the uncertainty about 'what will drive Japan's revenue and employment in the future.'"

Naoshima goes on to underscore the economic conundrums Japan faces: People think that Japanese people save too much, thus dampening demand, but actually the household savings ratio is one of the lowest among major economies; on the flip side, domestic consumption is stagnant since wages haven't risen in the past decade; an export-led recovery may seem appealing but Japan's export ratio is low by international standards and stagnant wages in the past 20 years call into question the country's industrial structure; specializing in high tech products would also seem logical but Japan's global market share "has rapidly declined" and low levels of profitability suggest that the business model for Japanese industries that has "caused them to lag behind the world."

In response to these challenges, government officials told me last week that the broad strategy is to globalize Japan, making its social systems, ports, and infrastructure attractive to businesses that create value and jobs. Naoshima puts it like this: "If Japan wants to save itself from decline, Japan has no other choice but to aggressively push forward with globalization. However, if Japan pursues only globalization without taking action to stop the decline in its international competitiveness as a business location, Japan will lose both domestic jobs and added value."

A major element of this strategy will be to "globalize human resources." This means the country's education system must be modified in order to create a more worldly mentality among the next generation of leaders, thus slowing the inward-looking direction or "Galapagos syndrome" as I have called it. One of the most creative proposals I heard last week is to encourage university students to study abroad by offering a ten-year income tax break to those who take advantage of the program. As these more cosmopolitan leaders enter the job market, they must find companies with a more globalized governance structure, diverse board of directors, and global business strategy, one official told me.

Japan Needs More Mavericks

It's nearly a cliché to say that in Japan, the nail that sticks out gets hammered down. Harmony and conformity are prized in big organizations. But these qualities can also lead to stagnation. Entrepreneurship requires a bit of rebelliousness.

During my trip last week, I traveled to Numazu for a day to visit one of the most innovative breweries in Japan. Baird Brewing Company is a joint partnership company that was founded in 2000, and in recent years has received much acclaim for its high quality, creative beers. I had the great fortune to meet the company's founders Bryan and Sayuri Baird, a husband and wife team. Bryan graduated from Johns Hopkins SAIS in the early 1990s and came to Tokyo to enter the corporate world but had another calling. "I didn't know much about brewing at the time but I knew how to study," he said. Using passion and determination, he founded the company with some friends. For the first few years, his beers were dismissed as too challenging. His customers were initially afraid to try something new. For the same reasons, Bryan's competitors in Japan were brewing up pale, uninspired, safe lagers. Bryan stuck to his principles and kept making a great product that emphasized Japan's proud tradition of craftsmanship (monozukuri) until his customer base caught up with him.

"The Japanese people need to overcome their fears and be the nails that stick out," Bryan told me. Bryan is an entrepreneur who embodies what Japan needs—globalized human capital creating a business that adds value and jobs. Another notable maverick who has been globalizing Japan includes Rakuten CEO Hiroshi Mikitani who is making English the official language at Japan's biggest online retailer. Fast Retailing, Nissan Motor, and Toyota Motor also are moving in the direction of adopting English at the workplace.

In politics, LDP star Taro Kono recently published a book on how he is going to revive his party. The main message is: As a nail that has stuck out in the LDP, he knows how the party can revive the economy. Japanese culture is famous for its perseverance and the country's history proves it. The country needs some major changes in order to prosper. For it to create real change, Japan needs more mavericks. And to pilot away from the rough waters, it will need a bold leader; it needs a captain.

Photo by quatro.sinko

A Renewable Super-Grid for Europe?

I encourage you to read this interesting interview with German energy analyst Gregor Czisch on the potential for a cost-neutral renewable super-grid linking Europe and North Africa. I've selected a few key quotes here highlighting the policy and geopolitical concerns.

The gas pipelines currently in use act exactly like a super-grid, transporting gas from Sahara and from Siberia to Europe. There is no conceptual difference from transmitting electricity instead of gas.
The scenario with renewable electricity would be instead much more secure, because the sources can be diversified, with less dependency from single countries.
If we look at the recent Copenhagen debates: instead of developing new ideas, they are still discussing about the trading of CO2 emissions, carbon limits, carbon-taxes and other old-style proposals which hardly are effective because they are too much based on the unrealistic believe [sic] in the positive market forces and neglect the inelastic behavior of the consumers in the case of energy consumption.

We further need a harmonized regulation to support the financing of these projects, for example a common European feed-in tariff able to cover the cost for production and transmission of the electricity.

To import 10% of its electricity demand from wind energy in Morocco, Europe would have to invest about 3% of its GDP in wind generators in Morocco. This corresponds to roughly 200% of the Moroccan GDP. Such a decision would boost the local economy, creating jobs, local competences and industries.
It would be a clear sign towards a systematical change in the way we live together, because it would not be a fragmented intervention or a temporary help for a developing country, but a sustainable investment in order to serve for a mutual interest in the long term.