Founded in July 2009 to promote innovation, encourage entrepreneurialism and inspire R&D synergies for the following 15 years, the Innovation Network Corporation of Japan (INCJ) is helping improve Japan’s commercial competitiveness and investing in startups and venture companies, at home and abroad. Chairman & CEO Toshiyuki Shiga explains the impact the corporation is having and where its focus is sharpening for its next seven years.
What would you say are the main achievements of the INCJ so far and what is left to be done in the next seven years?
We have two big objectives: one involves the reorganization of large companies to improve competitiveness. Five years ago, the INCJ invested to merge two companies’ forklift sectors—Nissan and Hitachi—to create a bigger one: UniCarriers Holdings Corporation. After this restructuring, Unicarriers was growing. We sold its entire stake to Mitsubishi Heavy Industries, Ltd. and Mitsubishi Nichiyu Forklift Co., Ltd in 2016. This is one good example of where we are injecting the investment for growth among the largest companies in Japan.
The second of our goals is to invest in startups and venture companies. We have already invested in more than 100 companies. In fact, around 80% of our investment is targeted to this kind of companies.
These are our two objectives, the so-called private equity fund and the venture capital fund. I consider that we have made good progress during these first years.
Investment by Japanese venture capitalists totaled $1.2 billion in 2014, dwarfed if we compared it with the approximate $48 billion spent by their US counterparts. The INCJ was launched to promote the creation of next-generation businesses through open innovation, the flow of technology and expertise beyond the boundaries of existing structures. What are the main challenges that innovative Japanese companies and startups are facing to attract funds?
Actually there are several reasons why Japanese venture capital is not as attractive when compared to others, like the US one or the Chinese. Although the situation is improving and the total amount of venture capital investment is increasing, it is true that we can still make it better. Japanese young people have the tendency to join large companies instead of starting their own ones. Japanese larger companies are not so much interested in M&A for venture companies. Venture companies think it’s better to do IPOs by themselves rather than buyouts. The ecosystem does not allow startups to grow if they are not well established. One of the objectives of the INCJ is to enhance the ecosystem for venture companies. We are not only providing funds, but also fostering people to grow venture capital.
Regarding the “open innovation”, Japan also needs to work hard, especially from the large companies’ side to join efforts and work closely when doing R&D.
What are the key aspects INCJ takes into account in order to choose and fund a project?
We are focused on startups that are in their early stages. Once they reach their middle and later stages, the private venture capital sees more potential to invest in them. On the contrary, when startups are in their early or pre-early stages, usually there are no private venture capital investors interested in injecting capital into them. The INCJ acts somehow as a bridge that connects the lower stage with the upper stages in the evolution of innovative startups.
First of all, profitability and feasibility are important elements. However, we are in a public/private fund, so we have to consider more what will be the investment impact on society. Most of our funding comes from taxpayers, so we have the obligation to contribute to Japanese society and industries. Profitability and feasibility must be considered, but on top of those two elements, we have to consider the social impacts.
Abenomics has placed a strong emphasis on the energy sector, including the liberalization and deregulation of it to reduce utility charges and diversify services by increasing competition. With this sector being a priority for the INCJ, what are your expectations regarding these legal reforms? Do you think the push will help in positioning Japanese companies to become more competitive?
Energy is quite an important element for Japan, especially after the shutdown of our nuclear plants. Our dependence on oil and gas should be reduced. With the recent reform we are experiencing an increase in competition but the legal changes are recent—they just took effect in April—so we have to wait a little bit more before assessing the effects of this deregulation of the sector.
The INCJ supports projects that combine technologies, varied expertise across industries, and materialize open innovation. What are the most exciting, innovative projects in which INCJ is investing that you would like to highlight?
We want to focus our efforts in the so-called fourth industrial revolution. The Japanese government recently made policy guidelines to enhance the IoT, AI, big data and robotic industries. This is what they call the New Industrial Structure Vision. We are now considering how to support the government’s efforts in this regard for the Japanese economy. The fourth industrial revolution will be the main driver to increase Japanese GDP. One of the biggest challenges when pursuing this goal is the labor shortage that Japan is facing; this is becoming severe as time goes by. The robotics industry plays a big role in compensating for this shortage, but more structural reforms will be needed to correctly address it.
Abenomics also plans to double foreign investment in Japan. In Atonarp, a company that develops and manufactures miniature equipment for molecular-level composition analysis, INCJ is proving both funds and management. Part of their funding is also being provided by US investors. What are your strategies to encourage American investors to fund INCJ-selected companies?
At the INCJ, we are also investing in overseas companies to get technologies or business models that we do not have in Japan following the pursuit of open innovation. We invest in overseas companies and utilize their know-how to contribute to the growth of Japan. We are interested in technologies, regardless where they come from, as long as they are relevant to improving Japanese industrial competitiveness.
What role will partnerships with universities play going forward?
One of the weaknesses of bigger Japanese companies is that they are not so much into collaborating with universities. Actually, the percentage of the total R&D expenditure of collaboration with universities and scientific institutes is quite small if we compare it with the levels of Germany or the US. Japanese companies have a strong tendency to suffer the “not invented here” or NIH syndrome. This is very much related to closed innovation strategies. Larger Japanese conglomerates are obsessed with developing and inventing by themselves; they are not so much interested in acquiring technologies developed by other companies.
This stance originates from a long time ago. In the past, one of the strengths of Japanese companies used to be the manufacturing area, with field laborers working hard along the “kaizen” (daily improvement) mentality, to deliver high quality products. But back then, they also focused too much on their own business rather than collaborating with others.
For example, the automotive industry is still very strong when compared to other countries; Japan still has the biggest global market share. However, the technology will change soon. 90% of the automotive nowadays depends on hardware, while the software part is only 10% of the product value. In 5 to 10 years from now, the software will become prevalent on autonomous cars, connected cars and electric cars. So it will be necessary for the current successful companies to acquire software technology. It will be impossible for them to keep on track with the market if they plan to start from zero without any collaboration from universities or companies from other sectors. There are companies such as Google and Apple that are specializing in the software area and are looking to collaborate and create more open innovations. Japanese companies should take this opportunity in order to move forward.
What could be done to improve Japan’s innovative capacity?
The INCJ’s mission is to promote open innovation to enhance Japanese new industries. For instance, Japan ranks third in R&D expenditure. However, regarding output, meaning how much new innovative technologies are being created, Japan ranks at number 26. This means that even though Japan spends huge amounts of money (around 13 trillion Japanese yen just among the larger corporations), they are not innovating that much. Many companies are creating the same technology, duplicating each other and redundancies are common.
Bio-fuel is the best example of this. More than 10 companies are researching in this field, on the same thing. Top managers are starting to take open innovations in consideration but very slowly. It is a problem of Japanese mentality. Everybody wants to do innovation by themselves rather than sharing efforts and resources.
When we met with Ishige-san of Jetro, one of the interesting things he said was that Japanese companies excel in terms of know-how, technologies, innovation, etc. But where they lag behind is in terms of marketing and communication, and promoting their products to the outside world. What could be done to improve Japan’s nation branding, especially among innovative companies, now that it seems that all the credit goes to Silicon Valley-based corporations?
The keyword, again, is open innovation. Not only with universities, but also with rival makers, with competitors, to collaborate and create new innovations. Japan has good researchers and a high capacity of creating new technologies. But we are not so good in utilizing these resources. If we manage them to be more efficient, Japan will be back on the growing path.
The current situation is that Japan is losing its competitiveness. I will use another example: the INCJ is investing in a company called Japan Display. Large displays have become now more a commodity product with China leading this sector. This is why now the main Japanese manufacturers reconverted their business and innovate with new products like virtual reality glasses or automotive monitor displays, sustaining competitiveness in other ways.
In Japan there are way too many players in one industry. While they are competing with each other within our national market, they end up sacrificing much of the investment for the future. This is another factor that contributes to companies gradually losing competitiveness.
In the automotive sector, Japan has 8 automotive companies and 4 truck makers: 12 companies total. The US has only 3, the same number as Germany. France has 2 and Italy 1. Half of the global passenger car markers belong to Japan. The Japanese market is so saturated that they can only get real profit from the overseas market. One of the important objectives is to integrate and consolidate, enhancing their competitiveness again.
After working for the auto industry for 39 years, you have been already for more than a year at the INCJ as CEO and Chairman. What do you hope most to accomplish?
The best way I would like to end my time at INCJ is by ensuring there would not be any need of public private funding in Japan to boost innovation. That will happen once private ventures have already grown and have a powerful funding capacity so they can support earlier and pre-earlier startups. I hope that after the following seven years, all large Japanese companies will have moved towards an open innovation model by consolidating each other’s research and development efforts with good M&A.
I have hope that this will happen. Recently I visited ABEJA, a very innovative company founded by three very young and talented guys, aged 28. They are very passionate about what they are doing. It was very gratifying for me to meet them, because usually, as I said, Japanese young people want to join large companies and prefer more stable lifestyles rather than founding their own companies, challenging themselves, looking for funding and fighting for it. I hope young people will have this strong entrepreneurship and challenge spirit, and alongside that, venture capital would support them. This would be really the ideal situation.