Seibu Railway Company Ltd.

1-11-1 Kusunokidai
Tokorozawa City
Saitama Prefecture
Japan
Telephone: (42) 926-2035
Fax: (42) 926-2237
Web site: http://www.seibu-group.co.jp

Public Company
Incorporated: 1912 as Musashino Railway Company
Employees: 15,751
Sales: $3.92 billion (2004)

Stock Exchanges: Tokyo
Ticker Symbol: SBUR F
NAIC: 482111 Line-Haul Railroads; 71399 All Other Amusement and Recreation Industries

Seibu Railway Company Ltd. (Seibu Railway) is one of Japan's leading railway operators and the nucleus of the Seibu Railway Group of companies, whose interests range from railways to real estate development and hotel operation to the ownership of one of Japan's leading baseball teams. Overall, the company owns 81 hotels, 52 golf courses, and 36 ski resorts. Chairman Yoshiaki Tsutsumi—once dubbed the richest businessman in the world by Forbes magazine—was arrested on charges of insider trading and falsifying financial documents in early 2005. The scandal surrounding his arrest and an enormous debt load related to real estate development ventures forced the company to begin to restructure its holdings in 2005.

Early History

The origins of Seibu Railway lie in a railway company called Musashino Railway Company, founded in 1912 by one of Japan's most famous entrepreneurs, Yasujido Tsutsumi. He was a Tokyo-based businessman who was seeking to profit from Japan's fast-growing economy. In 1872 Japan's first railway was opened, providing transport between the cities of Yokohama and Tokyo. The ensuing 40 years saw Japan industrialize at a fast pace. The government's policy was to encourage private investors to develop the infrastructure, and it became apparent that the electric railway would be the dominant form of public transport in the Tokyo area. The government began awarding licenses to investors who wished to develop and build track along major routes. Tsutsumi obtained a license for the construction and operation of an electric railway between Ikebukuro in central Tokyo and the outlying town of Tokorozawa. The government, as it had done with all the private railways, issued guidelines on the fares that could be charged. Tsutsumi succeeded in raising ¥1 million in capital for the company, Musashino Railway Company (Musashino). Construction began in 1912 and was completed three years later, when passenger services between Ikebukuro and Hanno, on route to Tokorozawa, commenced. The initial trains were steam-driven, as the 44-kilometer route was not electrified. Electrification took place in 1922, and the track was extended to Tokorozawa. In the following year, however, the Tokyo area experienced a catastrophic earthquake, with devastating consequences for the infrastructure. Large portions of the Musashino track were ruined, and reconstruction took more than a year. Musashino, and the city of Tokyo in general, recovered quickly, however, and by 1927 the company was able to open a new service between the city of Nerima, near Tokorozawa, and Ikebukuro. The service was double-track, permitting trains to run more frequently.

By 1930 Tokyo was one of the largest metropolitan areas in the world, with a population of more than three million. The agricultural areas surrounding the city gradually became residential as the city grew. To a large extent the growth was most pronounced in the vicinity of major rail routes, and Musashino saw steady housing development along its two routes. This meant a growth in passenger volume and revenue. The company continued to invest in track, converting all to double by 1930. Branch lines were built from the main lines to cater to local residential areas. Musashino's main rival at this time was the Tokyo Express Railway Company (Tokyu), under the leadership of Keita Gotoh. Gotoh and Tsutsumi became fierce rivals, as Gotoh's strategy was to take over smaller railway companies and thus expand his empire. Indeed, by the late 1930s Gotoh's company had swallowed up almost all the private railways in the Tokyo area, one of the exceptions being Musashino. The two companies also were faced with competition from the nationally owned railway network covering the whole of Tokyo. Musashino flourished, however, and in 1940 acquired Tamako Railway Company, which also had escaped takeover by Gotoh, and with it an additional service in the vicinity of its network.

In the early 1940s Japan was preparing for full-scale war with the Allies. All major companies were ordered by the military government to play their part in this effort, and Musashino contributed by supplying railway freight cars. In 1944 Musashino's tracks were severely damaged by the bombing raids carried out by the U.S. Air Force and at the time of Japan's surrender in August 1945 its infrastructure was in need of rebuilding. Following the occupation, the U.S. command began the process of dismantling the huge Japanese industrial conglomerates that had emerged before the war. Tokyu was split up but Musashino, being smaller, was left with its routes intact. With Tsutsumi still in charge, the company became known as Seibu Railway Co. Ltd. (Seibu Railway) in 1946.

Rebuilding and Expanding in the Postwar Era

Seibu Railway began the rebuilding of its track, aided by grants from the government, which was in turn subsidized by the U.S. government. As well as rebuilding the old lines, Seibu Railway began the development of routes from Shinjuku, another major central Tokyo station, to suburban regions. The company also bought a baseball team, the Seibu Lions, in 1949. A stadium was built in the vicinity of Tokorozawa and the team soon came to dominate its league. Seibu Railway also began to develop the real estate it owned in the vicinity of its track. This became a lucrative source of income for the company, in addition to its core railway business. The company continued to invest in its infrastructure, with the 1950s being a time of extensive track expansion. The station platforms were expanded to accommodate longer trains, and the frequency of services along the major Shinjuku and Ikebukuro routes increased. In 1963 a ten-car express train service between Ikebukuro and Tokorozawa was inaugurated. In the following year the company built a large railway car depot at Koteshi, along the route, to service its rapidly growing fleet of railway cars. At that time the emphasis for Seibu Railway was on speed of service. Tokyo's population was growing rapidly, with the residential regions around Seibu's lines forming a continuous metropolitan region. The majority of the residents commuted to work in the center of Tokyo, and the morning rush-hour on Seibu Railway's lines was becoming increasingly congested. While expanding its services, Seibu Railway was aware of the safety risks of transporting hundreds of thousands of passengers daily. In 1968 Seibu Railway's train tracking system was computerized and television monitors were placed along the lines. Tokyo's many level-crossings had long been a source of accidents, so Seibu Railway installed automatic safety systems at its crossings in 1969; as a result, fatalities fell dramatically.

Seibu continued to develop its real estate and in 1973 completed a huge underground complex in Ikebukuro Station. This complex included shops and restaurants as well as Seibu Rail-way's terminals. The development of Shinjuku Station followed in 1974. In 1976 Seibu Railway completed the building of the Seibu Shinjuku Building, its first major piece of real estate near Shinjuku Station. Toward the end of the 1970s Seibu Railway installed a computerized switching system. The company also invested heavily in station improvement, building new stations, including Tamako Station in 1961, and renovating others.

With a large stake in the ownership of the company, Yasujido Tsutsumi's family was one of the wealthiest in Japan. Although the ailing Yasujido died in 1989, he had passed control of the company over to his son Yoshiaki in the 1970s. Seibu Railway's traditional rivalry with Tokyu had diminished as both companies grew into diversified conglomerates. The 1980s saw Seibu Railway diversify into resort development, beginning with a project on the Hawaiian island of Maui in 1987. The company continued to develop family homes along its railway lines. In the late 1980s, with the boom in Japanese real estate prices, the leasing of Seibu Railway property in central Tokyo became lucrative.

1990s and Beyond

In the early 1990s Seibu Railway ranked fourth behind the Tobu, Tokyu, and Odakyu Railway Companies in terms of passenger volume among private railway firms in the Tokyo area. Seibu Railway's railway business continued to be the core of the business, although in percentage revenue terms it was on a par with the company's resort and tourism businesses. The latter accounted for around 40 percent of revenue each, with the remaining 20 percent coming from real estate. The company's baseball team was extremely successful, winning the Japan Series three years in succession in the late 1980s. Yoshiaki Tsutsumi, who became chairman in 1989, planned on future diversification, having opened two large hotels in Hawaii and Yokohama in 1990. That same year, Forbes magazine gave Tsutsumi the title of the richest businessman in the world.

Key Dates:

1912:

Yasujido Tsutsumi establishes Musashino Railway Company.

1940:

The company acquires Tamako Railway Company.

1946:

Musashino becomes known as Seibu Railway Co. Ltd.

1968:

Seibu Railway's train tracking system is computerized and television monitors are placed along the lines.

1976:

Seibu Railway completes the building of the Seibu Shinjuku Building.

1989:

Yoshiaki Tsutsumi is named chairman.

2004:

Auditors discover that Kukodu Corp. has misrepresented its equity stake in Seibu Railway; Tsutsumi resigns.

2005:

Tsutsumi pleads guilty on charges of insider trading and falsifying financial documents.

The company opened the first Burger King fast-food outlet in Japan in 1993 as part of a joint venture. It also teamed up with the Saison Group to provide satellite broadcasting in Japan. In 1996, its Hawaiian subsidiary finished the $35 million restoration of the Mauna Kea Beach Hotel. The hotel was considered one of the finest on the island. The company continued to work closely with local governments to develop leisure properties. Seibu Railway designed the resorts, while the government constructed roads and the needed infrastructure. By the end of the 1990s, Seibu Railway had more than 80 hotels, 52 golf courses, and 36 ski resorts in its portfolio.

During this time, the company's railway operations remained on track, but profits began to dwindle at its real estate and leisure businesses. In the early 1990s, Japan's housing market had collapsed and in just a few years its economy had bottomed out. Faltering sales at Seibu Railway's real estate subsidiary forced the company to post a loss in 1996. Continued problems in the leisure sector led to a $33.86 million loss in 1999.

Seibu Railway forged ahead, determined to restore the profitability of its leisure business. It began to shutter money-losing operations at its real estate and golf subsidiaries. In 2003, it partnered with competitor Odakyu Electric Railway Co. to develop a tourist spot in Hakone, a hot spring resort area.

Seibu Railway's future was changed dramatically during the early years of the new millennium when the company was hit by a major scandal. In March 2004, six top executives were arrested on charges that they bribed corporate racketeers. A few months later, an auditor discovered discrepancies in Seibu Rail-way's ownership structure. Kokudo Corporation—a privately held company controlled by Tsutsumi—had misrepresented the size of its equity stake. In October 2004, Tsutsumi was forced to resign. In early 2005, he was arrested on claims of insider trading and falsifying financial statements. A March 2005 Asian Wall Street Journal article explained the situation. "Prosecutors allege that Mr. Tsutsumi conspired with several executives to falsify Seibu Railway's 2003 financial statement, which said Kokudo's stake in Seibu Railway was 43.16% instead of the actual 64.83%. The falsification was allegedly an attempt to hide the fact that a handful of top executives owned too much of the railway—a violation of Tokyo Stock Exchange rules." As such, the company was delisted from the exchange in December 2004. The scandal took its toll on company operations as well as those involved in it. Former Seibu president, Terumasa Koyanagi, committed suicide shortly after being questioned for his involvement.

Takashi Goto became Seibu Railway's new president in 2005 and Naoki Hirano was elected chairman. The two men were charged with restructuring the struggling company, which was carrying a $13.3 billion debt load and posted an $81 million loss in 2004. Although there was speculation that foreign investors would purchase Seibu Railway, the company's future remained up in the air.

Principal Subsidiaries

Seibu Construction Co., Ltd. (50%); Seibu Zoen Co., Ltd.(24.2%); Izu Hakone Railway Co., Ltd. (48.6%); Shinmachi Jari Co., Ltd. (46.1%); Ikebukuro Shooing Park Co., Ltd.(20.3%); Ohmi Railway Corporation (75.7%); Seibu Golf Corporation; Seibu Estate Corporation; Ohmi Kanko Co., Ltd.(69.4%); Seibu Travel Co., Ltd. (50%); Yodosei Corporation(89.7%); Musashino Jisho Co., Ltd.; Seibu Real Estate Sales Co., Ltd.; Lokerani Resort Corporation (U.S.A.; 72.7%); Moanam Corporation (U.S.A.); Nuiaina Corporation (U.S.A.); Seibu Unyu Co., Ltd. (94.1%); Seibu Bus Co., Ltd. (99.5%); Seibu Hire Co., Ltd.; Kyushu Seibu Unyu Co., Ltd.; Toshimaen Co., Ltd.; Seibu Real Estate Co., Ltd.; Makena Golf Corporation (U.S.A.); Hawaii Prince Hotel Waikiki Corporation (U.S.A.); Mauna Kea Beach Hotel Corporation (U.S.A.); Hapuna Neach Prince Hotel Corporation (U.S.A.).

Principal Competitors

Keio Electric Railway Co., Ltd.; Kintetsu Corporation; Tobu Railway Co., Ltd.

Further Reading

"Japanese Railway Tycoon Held in Insider-Trading Allegations," Asian Wall Street Journal, March 4, 2005.

"Land Fall: Seibu's Era of Development Projects Is History," Asahi Evening News, March 3, 2005.

"Parent Company Biggest Obstacle to Seibu Revival," Nikkei Report, May 25, 2005.

Rowley, Ian, and Hiroko Tahiro, "Seibu: Vultures Are Circling," Business Week, May 23, 2005.

"Scandal-Tainted Kokudo Eyes Full-Scale Restructuring," Japan Weekly Monitor, November 15, 2004.

"Seibu Still Cleaning Up Bubble Residue," Nikkei Report, December 11, 2003.

Zaun, Todd, "Guilty Plea in Big Financial Scandal in Japan," The New York Times, June 17, 2005.

—Dylan Tanner
—update: Christina M. Stansell