In this interview, Mr. Genichi Tamatsuka, President of Hearts United Group, gives his perspective on Japan’s digitalization, e-commerce and the overall IT landscape, as well as discussing the operations and strategies of his company, which, together with its subsidiaries, engages in software debugging, digital media, and other businesses in Japan
A report for McKinsey Global Institute argues that despite certain anti-globalist movements, our world has never been so globalized. He argues that we have entered a phase of “digital globalization,” one where “individuals, companies and countries alike use digital platforms to communicate (…) Thanks to social networks or e-commerce marketplaces, millions of SMEs are born global.” As a country which is often labeled as isolated, what is the impact of Digital Globalization on Japan? Do you believe that Japan is well prepared to seize the opportunities brought about by Digital Globalization?
Before Japan can focus on the global issues of digitalization and the resulting impact on society, we need to first focus on the problems faced within our own company as a result of Japan's aging population. In 2060, approximately ten million Japanese people will not be capable of contributing to the work force, which leaves us with the difficult problem of having to produce without the necessary work force. Japan, however, still has great potential, regardless of the unique situation in which we find ourselves domestically. The situation has actually motivated Japan to innovate new solutions and technologies, such as robotics. Japan has the capability of implementing these innovations and it is a fait accompli that these will be implemented and introduced to the world.
Japan has such high-quality companies in the manufacturing and industrial sectors, including engineering and automotive companies, and it is a requisite to create new types of solutions in order to compete in the global market. In terms of service sectors, i.e., Facebook, Instagram and Amazon, there is cause to question Japan’s capability to compete in the global market.
I am confident that Japan can secure a unique portion of service industries in regard to the fourth industrial revolution, with particular focus on those pertaining to the health care and automobile sectors; namely engineering and production. We had many venture companies in the past, but if we compare the magnitude, size and impact of these in society - there is a great difference.
Services in Japan accounts for almost 70% of the market and fragmentation is a resulting factor because no single company has a large enough share of the market to be able to influence the industry's direction. What are the positive and negative aspects of fragmentation in your sector?
From the view of all the service sectors combined, we can see many fragmented SMEs. If we compare Japan's prices of goods today with what they were twenty years ago, we can see that the prices are almost the same. In Korea, China, UK and the US however, the increasing prices in the cost of goods are much higher. This reflects the low level of Japan's deflation with the root cause being the extensive competition. However, under such extensive competition, companies strive to enhance quality and develop unique expertise to compete with other companies. Those who successfully conduct these efforts could compete in the market, and even if the prices of their services and goods become higher, consumers and clients would still want their products.
The domestic market in Japan has always been important in both the manufacturing and service areas, with companies focusing on the domestic side of the market. For example, digital retail - eBay and Amazon - when eBay entered Japan it failed massively. Today everybody is talking about Rakuten, which is the official marketplace in a digital platform for Japan. However, this company is only available in the Japanese language. So, Japan is open to the new digital era of globalization but still in 2017 the main app is only available in Japanese. Do you think that these kinds of barriers are something that Japan needs to work further on to further integrate this digital global market?
I agree. Japan is a small island country, and once something new pops up and becomes popular, it spreads quickly. Japan has to respond to such a situation and therefore it has no extra capability to focus on global expansion. In the meantime, Japan’s anime has been brought overseas - this is one example of Japan’s success. The answer to removing those kinds of barriers should not be to change the language of Rakuten to English. For instance, we can start approaching nearby countries, such as Southeast Asia and China.
Driven by the democratization of smart-phones, demand for games and applications has never been greater, which should logically result in an increased demand for debug & verification services. What are the main trends that your sector is currently experiencing and how is your company adapting its services to these trends?
A serious gap in human capital among IoT sector companies has been identified because of the decreasing population. Hearts United Group has a unique platform with laboratories located throughout Japan and 8,000 registered testers and is in a position to recruit workers for software testing and debugging of games and systems. We also have the ability to educate them in specialized debugging technologies. Today, there is a trend of shifting to new game industries and technologies such as IoT devices and iPhones. Any solutions in terms of AI and other technologies which depend on outsourcing and utilizing human capital are important. Equally important is the workforce to debug and fix the problem, the trainers, and the genius programmers who input the data into those technologies in order for them to implement this debugging system. Those technologies are widely discussed as something to create this kind of industry but it should be highlighted that human resources are needed to make this industry work as smoothly as possible.
Cyber security is the next area in which we wish to focus for the development of our company. This sector involves testers who already possess unique techniques and who are capable of debugging any kind of software from a variety of platforms and cutting-edge IoT devices. These employees are known as White Hackers. We aim to provide this service of human capital and technologies, such as AI - to debug the system - as a package for any kind of client.
As a sales point in Japan, products in shops are always aligned in a perfect manner, in the correct positions and order, to correspond with the customer’s needs. This mentality is something which is unique to the Japanese culture, DNA or breeding. In other countries, such as China and Europe, this type of order is not seen or expected. However, the Japanese people demand and expect to see this type of quality and find products accordingly to their needs. This is something which has a close connection to what we are doing here; a Japanese eye can naturally see software bugs and consequently rectify them. This is unique to Japanese DNA, and we wish to harness these natural abilities to create unique companies, which can compete in the global market. Japan is at the start of our global expansion, and we think Japan's potential in combination with our human capital approach for debugging and our approach to technology can create very unique solution models which can still compete in the global market.
The Gaming and Entertainment industry is experiencing incredible trends driven by innovative technologies. Augmented reality (AR), VR, multiplication of platforms. How do you imagine the future of the entertainment industry? How are these trends influencing your services?
Japan has a unique and specific culture in the form of anime. This is something that provides another opportunity in which to expand and introduce to other markets, especially the US. This strategy of introducing Japanese culture through animation is going to be shifting to games and introducing culture through gaming software. It will be implemented as a new kind of product introduction. The US is basically interested in combat games, and people are very familiar with those kinds of games. However, Japan can still introduce products based on intellectual properties that we possess. On the basis of that, we can introduce our own unique and desirable products. Even now in Japan, companies face some hard times in terms of downsizing while mobile and gaming software is on a new verge, and at the same time development expenses are increasing and development scale is expanding. As a result, the need for outsourced software debugging work is expected to rise in the near future. We can see new blood coming into the industry with the introduction of PS4 and Nintendo Switch as well as things such as virtual reality which is something newly introduced to the market. This may possibly help Japan’s market to grow domestically and on a global level. Pokémon Go is a prime example of this.
HEARTS UNITED GROUP began offering debugging services in 2001 under the name of Digital Hearts. Back in 2007, you were Japan’s first company to receive the Authorized Xbox 360 Test Program. Can you summarize to our readers the core pillars and activities of Hearts United Group today? Why are your services essential to the development of the content industry?
Hearts United Group's history saw an original focus on software including gaming software such as applications designed to run on mobile devices. In Japan, there are many people who use a combination of gaming devices, computers and smart phones, and therefore, it is necessary to test and conduct different types of debugging. We implement our know-how in order to perform accurate debugging in a new kind of testing environment that is receptive to new technologies. Software testing is necessary to ensure quality, and with digitalization including expansion of IoT devices, our services are essential and needs for our services are expected to expand in a wide range of industries. Seizing these needs is the key to our success, so we can say that our historical milestone is happening right now.
From FY 2013 to FY 2017, your sales experienced substantial growth, growing from 6.8 billion to 15.4 billion JPY. What were the core reasons for this growth in sales? Looking at the future, what will be your mid-term strategy to further develop the company?
The initial reason for the sales increase was due to the receipt of great feedback and winning the trust of customers at a time when Japanese software development was becoming complex. Publishers and manufacturers were starting to trust and seek out these kinds of solutions in software development, so the initial reason for the increase was the market itself and our ability to capture the market share. Another reason for the growth can be attributed to the successful way our laboratories and activities were introduced. These assist throughout Japan and help maintain quality assurance which is then recognized by our customers in terms of producing and providing high quality services. From now on, digitalization will accelerate in a broad range of industries such as retail, distribution and financial sectors. We wish to provide testing services for the software used in those industries and develop trust among clients.
Ten years after your foundation, your company started internationalizing, establishing subsidiaries in Korea, USA and Thailand. The years that followed, you continued your expansion, acquiring Aetas Inc (4gamernet) and you recently established a joint Venture with robotics company ZMP. Can you describe your international strategy?
Our market is currently small; however, from the present time onwards we wish to grow and accelerate our expansion into the global market.
We hold the strong belief that global success cannot be achieved without a very solid and strong domestic market at the company’s core. We aim to acquire partnerships with such companies to expand into the global market. One of the keys to success is in introducing Japan's unique situation together with the different kind of techniques for debugging services that we offer. This is how the market has been developed in Japan. In order to introduce this outside of Japan, we need to do so via local companies who already have a strong presence. We consider this to be the only way to acquire the speed and time we need to raise sales and be successful in this area. If we assume that this is the situation in North America, it is fine for Japanese people to go there to start their debugging and testing business; however, I think we need to instead build strong partnerships with companies who understand the value of our services, technology and know-how and who wish to integrate those things with their existing services. Our aim is to ideally find those types of partners. We consider that there are tremendous opportunities in the global market, with particular focus on China and the United States, who are our two main priorities.
Our company is looking for fresh decisions and new ways to obtain opportunities and to find these kinds of corporations. One example is JVC Kenwood who produces navigation systems. We are very keen and serious about finding joint venture opportunities. For instance, HEROZ, Inc. - an AI Engine producer - is another company we established an alliance to create new solutions and techniques. This is one of many examples of something our company did and will probably have to do, in order to implement our strategy and to create good, solid and lasting partnerships.
America has been experiencing several changes since the appointment of President Trump. Do you think these provide opportunities or challenges to your company?
We do not currently have anything which is impacted directly by President Trump’s policies. Before expanding to areas that will, we have to brush up on technology and solutions and seek potential partners.
What would be the primary focus in your role president of Hearts Group?
The primary focus is to improve productivity as a nation, and in order to do this, there is the fundamental issue of the human capital mobility. As a society we are extremely rigid, especially in regard to human capital. We need to work in collaboration with the government to weaken the degradation and improve the mobility of employees. Without doing so we cannot sustain the economy.
Another is to utilize technology more wisely, not only in manufacturing in large corporate sectors but also in smaller subsectors. We have the technology and solutions so together with human capital mobility and more leadership, especially in the service sectors, we have to create a society where talented young people with the potential to be leaders are encouraged and trained. They can then jump to the potential of their segments, fix the problems and implement ICT solutions, making the corporation highly productive as well as creating great companies.
These things are very important. I think this society needs someone like me to take a risk and enter new industries, solve the problems, develop opportunities and create totally new types of companies and markets.