Opening the kimono

By Nikki Mandow and Peter McLennan

Monday 1st April 2002

New Zealand businesses should be looking at Japan's recession as an opportunity, not a turn-off

It's 9pm on a Tuesday night in Ginza, Tokyo's high-fashion district, and the streets are busy with immaculately dressed Japanese wives buying Christian Dior outfits. Across the city in Roppongi the bars and restaurants are full of businessmen socialising after work. In Shibuya, hip-hop kids with cellphones are buying records and hanging out in caf�s. Everywhere, money is flowing.

Yes, this is the country that's been through 12 years of stagnation, where industrial production is expected to shrink 8% this year, and where consumer prices have been in continual decline for seven years. This is the economy where banks wrote off �54 trillion ($US450 billion) between 1993 and 2000 and have an estimated �20 trillion in bad loans still on their books, where interest rates are 0%, but consumer spending has been flat for 15 years. This is the place where the Nikkei stock market index lost three-quarters of its market capitalisation between 1989 (when it stood at 40,000) and now (it's a fraction over 10,000 as Unlimited goes to press) and where land prices have slumped 70% in the past 10 years.

What are the beautiful people doing living it up on the streets of the capital? For a start, it's Tokyo. Go to some small towns - or worse, the countryside - and the picture may be different. But Japan is a nest of contradictions. Despite the economic gloom, the country isn't Indonesia or Argentina, by any means. The economy is in dire straits, but the population of 126 million is still basically a wealthy one. It just refuses to spend most of its money. At $US4 trillion, Japan earns 58% of the total Asian GDP, but has only 4% of Asia's population. Even during Japan's so-called "lost decade" in the 1990s, the economy still grew an average of 1.3% per year - that's growth approximately equal to the size of New Zealand's entire economy, each year. In 2001 average Japanese household income was $US64,000, and the Bank of Japan estimates national savings at $US50,000 per head of population. Each time a Japanese wage earner gets an extra yen of income (a pay rise, a dividend payment, additional money from a rental property) he or she saves 87% of it, spending only 13%. That's an awful lot of money in the bank.

Don't be fooled. Japan is in a huge mess, and it's much worse now than it was at the end of the 1990s. Over the past few months some big companies, including some of the major banks and insurance companies, have fallen over - and there's more to come. The government has tried the normal monetary stimulus measures (reducing interest rates, pumping billions of dollars into unnecessary infrastructure construction projects) but none of it has worked. Various financial institutions, particularly the central bank and finance ministry, are reluctant to try unconventional means to stimulate growth, each presumably hoping the radical reforms will come from the other.

"The country's in gridlock. Until that is addressed, the stagnation will continue and the deflation will get worse," says Hitotsubashi University eco-nomist Professor Takatoshi Ito, a former senior figure in Japan's Ministry of Finance and more recently on a brief secondment to New Zealand's Reserve Bank. "If no policy action is taken, I believe there is a serious possibility of crisis in Japan in the next six to nine months."

Go for it

Last November the Asia 2000 Foundation invited four Japan experts to New Zealand to talk about the economy and the opportunities for New Zealand businesses. The economic message was gloomy, but the experts were surprisingly upbeat. Take Terrie Lloyd, a New Zealander who's spent the past 20 years in Japan, living through three recessions and founding eight companies. He's now the chief executive of Linc Media, a software, publishing and IT recruitment company. "The message is there's never been a better time to enter the Japanese market because the recession has made otherwise arrogant companies humble," he says.

Says David Mair, another Kiwi Japanophile who spent 20 years in Japan and is now executive director of New Zealand's successful window- and door-fastening company Interlock, "It's the golden time for New Zealand business in Japan. The best time to get into business is when things are tough. Businesspeople in Japan are questioning things, they are willing to listen to new ideas. When things are busy, they don't have time to listen. I've never seen so many business opportunities."

Like what? Well, there are some good Japanese companies going cheap. There has been a huge increase in foreign investment in Japan in the last couple of years. On a big scale, several large foreign companies have taken over failing Japanese corporates and turned them around. In 2000 huge French insurance company Axa took over Nippon Life. Nippon was losing money and there was talk about possible closure, but after Axa restructured (which included bringing in 200 Indian IT engineers to reconfigure the insurance business), the business made a profit the next year. "Axa wasn't scared to restructure and fire people," Lloyd says. "The Japanese have a cultural impediment in terms of dealing with their problems because they feel responsible to each other. It may fall to foreigners to help them understand what they have to do for themselves."

Renault has done much the same since it bought into Nissan. "It blows away the myth that you can't restructure a Japanese company," says Nick Nicolaou, chief executive of HSBC in Japan. "But perhaps you have to be a foreign shareholder before you can manage it."

Bargain banks

Okay, so you aren't a $US166 billion company like Axa, with money available to buy a big corporate? No problem. As well as banks and life insurance companies being up for sale themselves, many of them are fire-selling smaller assets. So-called "vulture funds" - US fund management companies, often with plenty of experience from the savings and loan scandal in the 1980s - are increasingly moving into Japan, buying into distressed assets, turning them around and then selling. "I asked a fund manager why it was that only US companies can do these vulture funds," says Ito. "His view was that any company with a niche in a certain field is welcome to buy assets in Japan."

New Zealander Jonathan Hendriksen is a bit of an icon among western businesspeople in Japan. He started out as a bellboy at the Tokyo Sheraton in 1989, then moved into the internet business in the mid-1990s, eventually doing a deal with US internet advertising firm ValueClick, starting up ValueClick Japan in 1998.

Hendriksen successfully listed ValueClick Japan as a public company on the Tokyo Stock Exchange, the first internet company to go public in Japan. Simply listing in Japan is a major achievement, given that there are over 2.3 million companies but only 4000 are publicly listed. "One of the good things about Japan is its scale of economy. Doug Myers, who tops the New Zealand Rich List, probably wouldn't even fall into Japan's top 200. Just the size of this economy is exciting for anybody," he says.

But Hendriksen believes there is a certain leverage in being foreign in Japan. Having a foreigner turn up with a business proposition gives it a shock value for potential partners, suppliers or customers. They remember you, Hendriksen says, and then you can send a Japanese person in to follow up.

Establishing relationships with potential business partners also extends into socialising. "I'll probably go out four nights a week drinking with potential clients. Going home at five o'clock to the wife and kids is just not a concept here in Japan. It would probably be impossible to do really well here, by doing that. A lot of the deals I have done have been sealed after 5pm. For example, we've just signed a deal with Television Tokyo, where they'll be advertising right across the ValueClick network in the hour this TV programme is going to be on. It's a really exciting synergy for us. But basically they wouldn't sign the deal. We'd get close, then they'd pull back. Then we went out for dinner, got sloshed, and next morning it was just bang-bang-bang, it was all on."

Online advertising last year accounted for 0.4% of Japan's $US53 billion advertising market, double the amount spent in the previous year. Predictions were that it would double again this year but Hendriksen estimates that, post-crash, that figure will probably remain steady at 0.4 %. "Next year I think things will start to pick up. We did about $US24 million in sales last year, with about $US6 million in profits. This year has been a bit of a tough year: we're predicting about the same sales figures, with probably no profit. Next year I'm predicting we'll do about $US60 million, and about $US10 million to $US15 million profit."

Ex-pat cream

A more obvious niche for New Zealanders in Japan is catering to the ex-pat community. Kiwis Hamish Ross and Shaun Conroy run Occidental Cars, a thriving $6.25 million-a-year business that finds cars for foreigners and handles the laborious paperwork involved in owning a car in Japan. Then there is Craig Evans, who five years ago founded recruiting firm Axcel Consulting. Among other things, Axcel assists US or European companies intending to come to Japan with recruitment, finding office space and market feasibility studies. Another New Zealander, Vanessa Bell, runs The Kiwi Kitchen, a Tokyo-based catering company delivering around $7000-worth a day of western-style lunches to foreigners at their workplaces.

Encouraging as these businesses are, many people believe there are far more mainstream and niche Japanese business opportunities that New Zealanders could be taking advantage of.

Linc Media's Lloyd sees huge opportunities for New Zealand IT businesses to link up with Japanese companies, to add innovative software to what's already being developed. Japan has 8500 software companies, according to the Ministry of Information and Technology; 4500 of them do development. "There's a lack of innovation in the software industry in Japan. They are crying out for leading-edge products that allow Japanese manufacturers to build around them … I see opportunities in core technologies, compression technologies, 3G telecommunications development, video-rendering technologies and security technologies, both at a carrier level and also on an applications level."

New Zealand businesspeople are not going to be able to do business with Japan long-distance, Lloyd says. "The best way [to start] is to take a young, single, up-and-coming manager in the company and just assign him to Japan for six to 12 months, with the goal of bringing work back home. The cost doesn't need to be excessive - about three times what it would cost to have them in New Zealand. Given the increment over and above what the company would earn in New Zealand, that is not going to be a huge hit."

Once you get into investing in Japanese companies, you're going to need a bigger commitment. Mair warns you need to be sure you have Japanese staff who understand the image and values of your company, and you have to be able to fund your ex-pat team in Japan for at least two or three years. "That's $3 million to $4 million, at least."

Another area Lloyd sees as having huge potential for New Zealanders is in IT training. "There are about 50,000 vacancies coming up every month. I would say as many as half are unfilled, month by month. The trouble is, most of the vacancies are in new technologies, and there is a shortage of courses, there's a shortage of young people and there's a shortage of people coming in from overseas, because the immigration authorities are very slow at taking people in."

Money for training

The Japanese have money to spend on training. A government scheme gives Japanese who lose their jobs (unemployment at the end of 2001 was 5.3%; some predict it will rise to double figures) about $US3000 to spend on retraining programmes, which can be used to go overseas to get training. It is rumoured that the allowance might soon go up to $US5000 or even $US10,000. "That makes it viable for unemployed Japanese to go overseas for six months, learn English, learn IT and then come back to Japan," Lloyd says. He has been in negotiations with a number of New Zealand educational institutions to take advantage of the trend. "I think the main opportunity for New Zealand is to operate as an offshore training and development centre."

There are also openings for New Zealand companies involved in producing high-quality, innovative healthcare and welfare-related products and services. Over 51% of Japan's population are over the age of 40, and that is predicted to increase to 62% by 2020. More worrying for the Japanese, the number of people over 70 is increasing by 600,000 a year (see "Japan by numbers").

Andrew White, Trade New Zealand's Tokyo-based trade commissioner, says his organisation is currently working with groups of exporters to assess the potential to introduce New Zealand health-related IT solutions, multimedia products and services to the Japanese market. "Companies looking into this market should bear in mind that the macroeconomic situation - likely to remain tough for the next year or two - doesn't necessarily equate with what is going on in the marketplace," says White. "It is fair to say that small niches in Japan can be quite significant in our terms."

Peter McLennan's trip to Japan was assisted by the Asia 2000 Foundation

The goods

Japan is New Zealand's third-largest trading partner, following closely behind the US, with Australia way out in front. We earn around $5 billion each year from Japan, our leading exports being aluminium, forest products, meat and fruit. The education and tourism sectors are also proving to be strong growth areas, although tourism has slowed following the September 11 terrorist attacks in the US. Currently around 11,000 Japanese come to study in New Zealand each year, with a strong interest in courses that integrate English study alongside business and computing or vocational training. Japan is our largest offshore market for education services.

Japan by numbers

Clint Laurent, head of Asian Demographics, spends most of his time looking at demographic data for various Asian economies and extrapolating it out into business opportunities. Laurent sees the opportunities for New Zealanders in Japan falling into five main categories:

1. Working age empty nesters: There are about 19.7 million 40–64-year-olds in Japan. They are at the peak of their earning career (although they are also at most risk of losing their jobs), and have no children at home. "They are going through a change in lifestyle with more leisure time and more disposable funds," Laurent says, and are starting to spend money on things like home furnishings and holidays. "They want something a bit different. Blue-coloured ceramics from New Zealand just walk off the shelves."

2. Merry widows: In 2001 there were 3.9 million widows aged over 60 in Japan. By 2021 Asian Demographics predicts there will be 4.9 million. They want safe, well-organised holidays; home security and home entertainment products; and further education courses.

3. Seriously aged: The number of people over 70 in Japan will increase by 600,000 people a year between now and 2021, Laurent says. That's an increase about twice the size of the population of Christchurch every year, and will take the number of over-70s from 15 million now to 27 million in 2021. Many of them will have been smokers, and they will be relatively affluent. They will want things like retirement facilities, medical services (Fisher & Paykel Healthcare should be well positioned with its respiratory products) and disability support. "Find a product, choose one suburb of Tokyo, for example, find someone with good contacts and distribution in that area and focus on that," Laurent says.

4. Worried employers: The ratio between the working-age and non-working-age populations in Japan will gradually decline from 6:1 now to 2:1 in 20 years' time. This poses a huge problem for employers looking for workers. Opportunities for New Zealand companies include software that reduces the number of people a company needs to employ, training people in software or new work practices and outsourcing. "New Zealand is a low-cost environment. If you are a firm with a particular capability that could be useful, how about suggesting an outsourcing deal?" asks Laurent.

5. Sophisticated consumer: Of all Japanese over 15, just under 30% have a tertiary education. "Educated people read more, are more interested in trying new things, different lifestyles and different consumption patterns," Laurent says. Think about specialty food products, too. "Total expenditure on food is increasing 0.5% a year and will reach $US45.6 billion by 2010. New Zealand's capability to produce interesting specialty food is high." Remember that the Japanese consumer is very quality conscious, and that you are dealing with small households - 52% of people live in one- or two-person households - so package in small portions.

Don't fall on your sword

David Mair went to Japan in 1981 and quickly ran out of money. He ended up spending over 10 years with the largest Japanese electronics company, Matsushita (National, Panasonic, Technics), before returning to New Zealand. He is now in charge of the Japanese market for New Zealand window- and door-lock company Interlock.

Mair reckons far too many New Zealanders wanting to do business in Japan get hung up on the cultural stuff - how to exchange business cards and learning to say "I don't like seaweed" in Japanese. Sure, etiquette is important for the Japanese (Matsushita had a "bible", with rules on everything from where you should stand in the elevator to what colour socks you should wear), but Mair reckons New Zealanders can largely forget the cultural stuff, even to the extent of emphasising your "New Zealandness" for effect. Former boss at Interlock Stewart Young used to refuse to allow Japanese counterparts to smoke in meetings: "If they lit up, we walked out". Instead, Mair says, concentrate on the business basics, like having a business plan clearly thought out before you go.

Simple, huh? Well, no. "Like any market, you need to understand it before you go into business in that market, and products and services have to be adapted as well," says ValueClick's Johnathan Hendriksen. The trouble is, business basics in Japan are pretty demanding:

Quality first: Getting quality right is undoubtedly the most crucial part of doing business in Japan, so companies need to have their quality assurance programmes working well before they start supplying the Japanese. "You don't make the same mistake twice in Japan," says Mair. Even that first mistake can be expensive. "If they find one defect in a box they will send the whole shipment back and demand that you replace it all - and you'll pay for everything, including the shipping."
Price last: "Too many Kiwis talk about price too quickly," Mair says. Don't talk about price until you've nailed details on quality and delivery. And remember, consumer prices have been in decline for seven years. Customers are going to be looking for an annual price decrease. Factor that, as well as the uncertainty of the exchange rate, into your initial pricing. And don't set your margins so low that you end up not making money from the deal. If you want a rule of thumb, if you're launching a new product in Japan, make sure you can get a 50% profit margin.
Hedge: "Consider hedging the currency," Mair says. "Japanese customers expect you to price in yen, so you bear the exchange rate risk. Hedging could help you last through the tough times. Remember, when the currency goes in your favour, your Japanese customers will expect you to share the benefit, but when it goes against you, they'll try to make you take the hit.
Share the spoils: In Japan you do best when you work with someone else, says Linc Media's Terrie Lloyd. "Most US companies fail because of their culture of wanting to do everything themselves."
Don't change the message: Kiwis often start off talking about one price or set of conditions, then change it. Or we offer two competing companies different deals. Resist the temptation. "I've seen far too many good business deals lost through inconsistency," Mair says.
Changes cost you: Every change you make to a product specification at your request will be treated as a reason for a price reduction, warns Mair, even minor things with no perceptible impact on the other person's business.
Boss begets boss: If you want to really get business done, send a senior member of the team. If you send an engineer, he'll meet an engineer - and engineers don't make commercial decisions, purchasing people do.
Act the underdog: "The Japanese fundamentally have the feeling they are being victimised in some way, so they strongly identify with the underdog," says Lloyd. "If you cast yourself as the little New Zealand company up against a big US one, you often get the sympathy vote.
Intellectual property: Don't go up without checking your intellectual property protection. Both Mair and Lloyd remember seeing many good ideas copied.
Language: Don't conduct meetings in Japanese, even if you have some language ability, Mair advises. It only puts you at a disadvantage. Make sure you have an interpreter arranged well before you get there. Be very careful making side comments in English; most Japanese businessmen speak far better English than they make out.
Data: The Japanese love data. Send them heaps of data, but understand that they will become more demanding in time.
Business relationships: The Japanese take a long-term view of business. It's very important to them to get to know the people they are dealing with and to trust them. You can't get that in a first meeting. On the other hand, the Japanese can be very loyal to good partners.
Control: Never send your schedule to anyone you are visiting in Japan. They'll fill up your whole programme so you can't talk to their competitors.
Plan ahead: The Japanese plan one month in advance if they want to have dinner with someone, so don't expect to get last-minute meetings. Plan your next visit as soon as you get back from the last one.
No naughties: "Too many westerners go up to Japan and are offered unlimited free beer, and drink it. They may also be offered girls [prostitutes], and take them," Mair says. This is never a great way to build trust, in a country where family is important.

Nikki Mandow
nikki@unlimited.net.nz

Peter McLennan

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