Iwase Cosfa: Developing Beauty and Happiness

Japanese cosmetics brands have historically faced stiff competition, particularly from the West and South Korea. These countries tend to shine due to their marketing capabilities, yet hidden within this narrative are interesting dynamics. It is noteworthy to say many of the active ingredients used by large international beauty companies originate in Japan with its strong ODM makers, and the shift in consumer preferences towards Japan’s ‘less is more’ philosophy, which emphasizes high-value products with fewer and more effective ingredients, is gaining momentum. What are the advantages of Japanese beauty products, and how do they compete with their competitors?

There is an annual cosmetics event held by the IFSCC (International Federation of Societies of Cosmetic Chemists) in locations such as the US or France. It is regarded as the Olympics of the cosmetics industry. In the technological division, Japanese companies receive the highest number of awards each year, followed by France and the US. This clearly shows how highly-valued Japanese cosmetics technology is around the world. Unfortunately, this technology is not fully utilized. This is due to geographical reasons. Japan is an island nation in the Far East, so it is hard for overseas brands to learn about and access this technology. The language barrier is also a hindrance to Japanese companies exporting these technologies.

Another important factor to consider is that the governmental approach is different. It takes time for drugs and quasi-drugs to be approved. The regulations are very stringent for cosmetics. This holds Japanese companies back from being proactive in developing new products, whereas, in China and Korea, the governments are very supportive of new developments. Also, Japanese people believe that Japanese skin is the most sensitive skin in the world. Whenever they get a small rash from using a product, there are huge complaints. Companies are, therefore, scared to try out new things even though they can ensure that the quality is good. Chinese and Korean companies, on the other hand, try new things, and if something happens, the tendency in the market is to accept it and then move on to the next thing. The safety-conscious Japanese market is one of the reasons why it is harder for Japanese cosmetics companies to leverage the technological advancements that they have already made fully.

Japanese companies are proactive regarding R&D and developing new advancements in the cosmetics and functional ingredients field. In the past, developing countries such as China and Korea had little knowledge of the effectiveness of active ingredients, and lacked the necessary purchasing power to do so. However, with the rapid development of the Internet and information technologies, they are now much more aware of the advantages of using these materials. They were also able to make the technological advancements and acquire the technology the Japanese companies had previously developed. For example, the technologies needed for fluorocarbon-coated ingredients have now been grasped by other nations.  During the last 20 years, Japanese engineers have been hired by foreign companies, which has helped them boost their technological capabilities. Now, Japan is about to be surpassed by these nations.

Until recently, France was the leading importer of cosmetics products to Japan.　However, they have now been overtaken by Korea and China. The reason for this is the remarkable technological progress made by Korean and Chinese companies. COVID-19 was a huge turning point for Korean and Chinese cosmetics companies as they introduced automation into their businesses, which helped them increase their efficiency and improve the quality of their products. They can now sell high-quality products equivalent to or even better than Japanese products at very low prices in convenience stores.

What do you believe Japanese firms need to do to avoid being surpassed by Korean and Chinese companies? What is your company doing to overcome this challenge?

With exchange rate fluctuations and the deprecation of the JPY, the cost of materials is rising. This is making it more difficult for Japanese companies to compete with Chinese and Korean companies. Also, their marketing strategies are one of their strong points. These companies are really good at using TV commercials, beauty magazines or influencers to advertise their products. This is true all over the world, including in Japan, making it even harder for Japanese companies to compete.

It is certainly no secret that Japan is facing a demographic issue. Over the next 15 years, Japan anticipates a significant demographic shift characterized by an aging and declining population. Consequently, this will lead to a labor shortage and a shrinking domestic market. To be more specific, Japan expects a labor shortage of about 11 million people by the year 2040. What opportunities and challenges does this create for your company?

I think it is only in a few specific countries, such as Africa and India, that we see significant population growth. In other countries, including China, Korea, and Japan, the population is shrinking. Replacing manpower with automated technology will be important to address the labor situation. Also, if you take France or the US, for example, they are actively welcoming immigrants. I strongly believe the Japanese government should adopt this strategy. I foresee an acute drop in the population and the economic power of Japan in the future.

As for our company, to attract new staff, we are trying to create a comfortable and more attractive working environment. First and foremost, we are increasing the salaries of our employees. We are also paying university scholarships on behalf of our employees and introduced a continuous employment system so that our employees can continue working for us even after retirement age. Building a purpose-driven company is essential for us. We believe that improving employee motivation is only possible if they feel a sense of meaning and fulfillment in their job, as well as in their personal life.  (ikigai in Japanese) It is very important for our company to maintain our human resources.

The shrinking population is causing a shrinking domestic market. In our many interviews with different types of companies related to the cosmetics, beauty, and health industries, we heard how important it was for them to go abroad and find new opportunities and unlock new markets. In your specific case, your company already has a strong global presence. Nevertheless, with this shrinking domestic market, what strategies have you employed to overcome this issue, not only in terms of hiring but more on the business side?

The shrinking population will lead to a decrease in the amount of "skin". However, longer life expectancy means that people are able to use cosmetics products longer. Also, new generations will likely be using more and more cosmetics.  This applies to the younger generations and aligns with this gender-free concept that promotes the use of cosmetics. Those living in developing nations will also become more and more aware of using cosmetics. For these reasons, I believe that the overall global cosmetics market will continue to grow.

One potential risk that we do see is the idea that virtual reality will become more and more popular. People may not need to commute to work or physically interact with others. That will mean that people may no longer require  makeup. If this happens, the cosmetics market will shrink significantly. Therefore, we are trying to focus on strengthening our welfare business. Regardless of whether you are living in the real world or in this avatar virtual reality world, you will still need to maintain your health. Functional ingredients will be key in driving personal health.

Recently, we have seen an increase in the use of technologies in the cosmetics industry. This is especially true in the product development stage. With data concerning skin types and environmental factors, you can create a more user-friendly experience. We saw that your company has a database with over 5,000 types of cosmetics raw materials. What competitive advantages do you gain from having such a large database of raw materials?

We are now at the first stage of creating a massive database that could be fully utilized with AI and other technological breakthroughs. Our current database is publicly available and allows people to search for ingredients and products by using INCI names.  We have over 2,090 suppliers, and we deal with over 6,000 ingredients. That is why we are making efforts to create a database that anybody can access. We hope this will lead to the creation of an Iwase Cosfa fan base. Once the foundations for the new database have been completed, we want to use AI technologies to enable personalized formulation proposals and customized ingredient blends, and thus achieve the best possible formulation results.

Traditionally, Japanese companies, including ours, have retained this kind of information and used it as a company asset. However, the situation is changing, and open innovation is becoming more active. We want to contribute to this open innovation and provide a platform to drive the industry forward, so we are actively making this information available to the public.

Your business trades in large amounts of raw materials that are used in the production of cosmetics. Some examples include Flavosterone SB, Peach Ceramide Water, and Frescolat® ML, which are used in products. What ingredients do you see in the cosmetics industry in the most demand?

That is very hard to tell as all fields are growing. One of the biggest hindrances of Japanese regulations is that products are categorized into miscellaneous goods, cosmetics, quasi-drugs, and pharmaceutical drugs. With pharmaceutical drugs, you can claim the efficacy linked to using a　specific product. However, in the case of cosmetic products, you are not allowed to pursue their practical efficacy, and only a very limited number of efficacy claims are permitted. That is part of the regulations in Japan. On the other hand, there are no such strict regulations in Korea, China, and the US. Therefore, there is a higher concentration of more active ingredients in the cosmetics industries of those countries. It is a paradox in Japan. You want to achieve the best possible results. However, you are not able to pursue efficacy and promote your results. It is, therefore, difficult to balance the R&D process.

Within the Japanese industry, the regulations are a huge dilemma. Japanese engineers and researchers are very diligent, and develop the best technologies. These technologies allow for remarkable product efficacy. However, due to Japanese regulations for cosmetics, you are not able to pursue this efficacy. That means we must dilute the solutions to implement them in cosmetics. Let us compare this to the German autobahn, for example. You can drive at speeds up to 300 km/hr. In Japan, the speed limit is 100 km/hr. Although you may have a very fast car, in Japan, you cannot make the best use of it. Likewise, although Japanese technologies for active ingredients are very high, you cannot fully integrate them into Japanese products. The technology ends up being incorporated by other countries.

That being said, gut bacteria have been shown to be closely linked to skin beauty and brain health, and there could be a growing demand for holistic health and beauty products.

This new approach, which considers the body in its entirety, is another area in which I see growth.

Your company is celebrating its 93rd anniversary this year. Could you please explain to our readers your firm’s main competitive advantages and what makes you different from your competitors both here in Japan and overseas? What makes you the go-to partner for global customers?

Our company was established 93 years ago. It took a lot of work to reach this point. I am the third generation of this company. The founder was my grandfather. The evolution of our company was unique. I am a quiet person like my father and grandfather. We let our employees take the initiative in our business operations.  The opening of new businesses, M&As, and the opening of new offices in France or the US were all initiatives taken by our employees. Our management discusses these initiatives, determines the best way to proceed, and provides the finances to complete these projects. Also, throughout our company’s long history, we have always been very sincere towards our customers.

After WW2, dealing on Japan's black market was a common corporate practice. Sometimes, ingredients or cosmetics themselves were overpriced by up to 40 times the average standard price. However, our company refused to engage in such practices. We did not pursue profitability, but rather, we focused on being sincere and truthful to our customers. This philosophy led to our company’s philosophy today, and we have built strong relationships with our customers.

There have been ups and downs in the history of the company. However, my grandfather’s philosophy was to return ten times more than you received. Whatever our company is granted, we try to pay back ten times. This mindset has helped us get through the difficult times. When we were on the verge of bankruptcy, someone always helped us financially or gave us the support we needed. This allowed us to continue for 93 years. This mindset of treasuring the people affiliated with our company has led us to where we are today. Nowadays, this is referred to as corporate social responsibility. However, even before those words were commonly used, our mindset was that of a community-oriented business proposition.

Human relationships have always been an integral part of our company. For example, during my grandfather’s time, there was a customer who came from Kyushu to purchase our products. He repeatedly came to Osaka to make purchases, so we decided to establish a factory and disclose our know-how to him so that he could become a cosmetics company owner in Kyushu. He soon became the richest man in Kyushu thanks to the business that my grandfather helped him to build. Our company paid for everything and let him own the business.

As time went on, cosmetics companies started investing in real estate. However, due to financial crises, several of our business partners went bankrupt, and there were times when several months would go by without us making any sales. It became very difficult for us, and we were also about to go bankrupt. This is when the gentleman from Kyushu stepped in and lent us the money required to pay our debts with no interest or guarantee.

Before starting this company, my grandfather was a trainee at another company. When he started his own business, he gave the owner of his previous company the right to sell tobacco and built a small shop for him. When our company started to progress, we needed more finance. A company relative asked the bank to provide as much finance our company required. This was only possible due to the relationship and trust that we had built.

Today, you could not pull that off anymore. The social situation is indeed completely different. However, it is important to recognize that it was these human relationships and heartwarming connections that allowed us to come this far.

Throughout our time in Japan, we have increasingly learned about the importance of building a community through collaborative partnerships to remain competitive globally. This is especially true for trading companies that engage in imports and exports. What notable partnerships do you have overseas, and are you looking to expand on those moving forward?

Regarding our overseas strategy, our plan is not to collaborate with local sales agents but rather to have direct business with the cosmetics manufacturers and providers. We want to receive direct feedback and full support from clients after providing our materials. We are also collaborating with universities and companies that have not yet entered the cosmetics industry. For example, we help food companies develop cosmetic ingredients and find new applications for them. Our goal is to help companies in a wide variety of industries and that have never been in the cosmetics business before to start a new business. It is also good for us to find new materials and ingredients that can be used for new purposes.

We know that your company has a strong international presence with overseas operations in China, France, the US, and Korea. Where would you next like to expand overseas?
As I mentioned earlier, our overseas business is employee-driven, and employees themselves are taking the initiative. Wherever our employees find a potential market, we will look to expand. Nine years ago, we opened our office in France. We originally had two employees working there. That number has now increased to 27. Our France office believes that expansion to Africa is something we should consider now as there are emerging markets there. That is why we decided to open a subsidiary in Africa under our French company. Generally speaking, when a company expands its activities to Africa, it first establishes a base in Nigeria or South Africa. However, we are starting with Morocco thanks to  three talented Moroccan employees that we have at our French base. I strongly believe that by developing strong connections with the people there, we will be able to expand in both Africa and other areas. As for China, the market is still growing, so we need to focus on the market there. Also, the culture of Indonesia has changed. People who did not wash their hair daily are now doing so more frequently and, therefore, are using more cosmetics. The population of Indonesia is over 240 million people, so we see a lot of potential there.

I always tell my employees not to feel worried and to enjoy their work, as I, the President, take full responsibility for our business.

For more information, visit their website at: https://www.cosfa.co.jp/english/