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Changing domestic landscape spurs Japan Inc.’s global shift

Article - March 25, 2016

Firms that have rejuvenated their business models for a more globalized world are set to greatly increase overseas profits

A sound business philosophy, a growth-oriented shift, a long-term strategy – however you see it, the global marketplace can be any or all of these things, but in Japan it is something more: it’s an imperative. Japanese skills in manufacturing, electronics and precision engineering are not to be underestimated, but many analysts feel they are no longer enough in themselves to ensure that its flagship firms remain competitive in world markets where consumer demand is surging along with major investment flows heading to infrastructure and improved living standards.

“Industrial reorganization and co-existence through compartmentalization with an eye on global markets centering on Asia are essential for Japan to reawaken in the 21st century,” comments Masanori Murakami, Vice-Chancellor of Kyoto’s Ritsumeikan University, who is concerned by the fact that the engines that power the Japanese economy, domestic turnover and private consumption, have been losing their thrust.

Hard-core demography is the big problem. Japan’s population is aging fast and declining. For two decades, a prohibitively strong yen cost exporters many overseas customers. Outsourcing manufacturing and services and hiring skilled foreign workers are not as common as in other countries, and although almost every Japanese executive speaks some English, not all have the high level of competency required to close major deals.

Talented executives who are biz wizzes on their home turf too often fail to understand the dynamics of external markets configured in ways they are not familiar with.

The core issue for Japanese companies is establishing a long-term presence in foreign markets and finding out what your potential customers expect from you.

The yen has depreciated by 55% since Prime Minister Shinzo Abe introduced his ‘Abenomics’ package of economic reforms. But even the most favorable currency alignment will take you only so far, and nobody is more aware of those limits than Toshikazu Koike, President and CEO of Brother Industries.

“Japan definitely has great strengths such as the kind and generous spirit of its people. I believe that spirit to be one of the strongest in the world, but as for looking outward and being an open country in terms of mindset, regulations and policies, I think we are lagging far behind,” Mr. Koike says.

Although he does not exempt himself from that assessment, it is belied by the fact that the company he heads derives 80% of its revenue from foreign sales, having come a long way from its origins in 1908, when the founder used to go door-to-door selling sewing machines to Japanese housewives.

“In a way, we went overseas because it was necessary for survival. I went to the United States 34 years ago to develop the market for printers, faxes, multifunction products and labeling systems and we were quite successful. Our overseas business grew while sales in the Japanese market stayed level. Having had success in the North America market, we also became successful in the rest of the world,” he adds.

Keeping ahead of the cost curve made it expedient to transfer manufacturing facilities to China after Japan became too expensive. When the same thing happened in China, Brother uprooted once again and went to Vietnam, and four years ago opened its first plant in the Philippines. The result: since 2009 net sales have climbed from 597 billion yen ($5 billion) to 800 billion yen estimated for 2015.

People tend to think of merger and acquisition as a strategic tool for large cap companies, but with Mr. Koike at the helm, Brother has been aggressively pursuing product line diversification, with moves like its recent acquisition of the UK industrial printing and coding specialist, Domino Printing Sciences.

“Office products account for two-thirds of our turnover, but unfortunately their growth rate is starting to slow,” Brother’s president says. “People have stopped using printers and paper and rely more on smartphones or tablets. But we expect to maintain growth through a combination of new business opportunities, new products, a diversified portfolio, and developing the business in emerging markets.”

“The major goal has been to leave the last 20 years behind, and strengthen our will to open up Japan to the international community”

Takashi Goto, President & CEO of Seibu Group

American inspiration
Being known as “the Japanese version of IKEA” is not a terribly accurate description of how the Nitori retail home furnishings giant sees itself, but the company’s President, Mr. Akio Nitori, prefers to take it as a compliment.

“The biggest difference is that Ikea produces and sells the same products in all its stores worldwide, whereas we sell products specific to the area to meet the needs of that particular culture. For China, we take account of what they need and what will be useful to them.”

Actually, Mr. Nitori says he was inspired more by the United States, where he was impressed by the huge warehouse-like retail spaces, spacious homes enhanced with coordinated furnishings, and the mixture of flair and functionality in the design of everyday items. “Ever since I visited the US, my goal has been to enrich everyday life of the Japanese people. I made up my mind to develop and provide affordable and full-featured products for them.”

Nitori’s range of products consist of roughly equal parts furniture and assorted household goods. They are distributed through 401 stores around the world, including three new ones in southern California doing business under the AkiHome brand.

The company aims to continue its expansion in Europe, Asia and the U.S., with a long-term goal to have 3,000 stores worldwide. “For Asia, since it was even more behind than Japan, it is not so difficult to expand operations there. But you might ask why we operate in the US, where they are more advanced. We are really there to learn by operating there in a five- to 10-year vision, rather than to have short-term profits,” adds Mr. Nitori.

Constantly striving to learn from the U.S., the company has a program where it sends about 900 employees to America every year to develop best practices. “The reason I am doing this is because I feel that we still need to learn from the US and that we are still 10 to 20 years behind them. We are striving to close the gap,” he says.

While exporters may rejoice that the yen has been allowed to sink, Nitori is an example of a business feeling the Abenomics pinch, since most raw materials and 90% of its finished products are imported – mainly from factories in Vietnam and Indonesia. On the other hand, Nitori  stands to benefit if and when the Trans-Pacific Partnership (TPP) accord between the United States and the other regional economic powerhouses is fully implemented, allowing the unhindered flow of goods across their borders.

“I believe the TPP is a positive thing. It is very important to remove custom tax barriers between countries, not only bilaterally – for example, just between the US and Japan – but for all the countries, so that they are all on an equal footing to do trade.” says Mr. Nitori. “I believe that protection against trade has never helped any country. In Japan, the barriers are still very strong but I hope they will be torn down sooner rather than later.”

“We expect to maintain growth through a combination of new business opportunities, new products, a diversified portfolio, and developing the business in emerging markets”

Toshikazu Koike, President and CEO of Brother Industries

I, Robot
Indeed while the yen is down since Abenomics kicked in, whether that  is bad news or good news depends on who you talk to. One of the firms that has benefitted most from the depreciation is GLORY, which specializes in all things money – that is, systems and technology for handling, counting, safeguarding, transporting and authenticating currency.

“By the end of March this year, many corporations in Japan had achieved the best financial results ever,” says GLORY’s Chairman, Mr. Hirokazu Onoe. “Abenomics has enabled Japanese businesses to boost investment in facilities and equipment, and that has led to an increase in demand that the manufacturing sector in particular has benefitted from. So, all told, Abenomics has had a very positive impact on us.”

In this case, the decision to go global was prompted by a saturated local market. Japan is already one of the most advanced countries on the planet when it comes to systems used by banks and other financial institutions for money handling so GLORY’s potential for domestic growth is limited in its country of origin.

“I believe the Trans Pacific Partnership is a positive thing. It is very important to remove custom tax barriers between countries, not only bilaterally – for example, just between the US and Japan – but for all the countries, so that they are all on an equal footing to do trade”

Akio Nitori, President of Nitori

That was not so in 1950, when the government asked GLORY to come up with a coin-wrapping system, followed by prototype devices involving coin lockers, change makers, vending machines and other everyday applications.

Although the primary focus is still currency, the company has since branched out on parallel research tracks involving facial recognition software, mechatronics and other security safeguards. “This heritage of continually creating new products is something that is in our DNA and will continue to be in it,” Mr. Onoe avows.

And then there are the robots. Though GLORY was not involved in their design or core technology, these quasi-human machines have been incorporated into its assembly lines under an accord with the developer, Kawada Industries. The machines “learn” how to perform cyclical multitask functions by adapting their predetermined programming to new input coming from human or digital operators. “The point of the trials here is to show that human and robot workers can co-exist in the workplace,” says Mr. Onoe.

“We are going to face a future decline in human capital here in Japan, and we believe this is a great solution because with robots you can achieve higher accuracy,” he explains. “They come with a camera, while with humans there are bound to be mistakes. With robots we can also achieve multi-functionality so that in the daytime robots and humans work side by side, but only robots work through the night.”

“I think Abebnomics’ greatest contribution is that it changed the prevailing mindset. It helped us all to shake off the deflation mentality.”

Yatsuhiro Sato, President and CEO, Mizuho Service Group

After the storm comes the opportunity
For all its blowback and unintended consequences, Abenomics deserves full credit for having restored trust and confidence to investors and stability to the markets. That is what has allowed the specialists at the Mizuho Financial Group to step forward with the skillset and determination to become one of the world’s most trusted financial services groups with a global presence and a broad customer base and to contribute to the prosperity of Japan and the wider region.

For Mizuho’s President and CEO, Yatsuhiro Sato, there are no two  ways about it. “I think Abenomics’ greatest contribution is that it changed the prevailing mindset. It helped us all to shake off the deflation mentality.” Now Mizuho and similar minded institutions are prepared to help find productive destinations for the money Japanese firms squirreled away for safekeeping during the “lost decade” of asset bubbles and bad loans,  when corporate investment plunged by 27% and heavily indebted small and medium enterprises (SME) went under.

It is not only Japan’s bigger industrial companies that are reorienting towards world markets. With dwindling profits at home due to falling demand, Japan’s SMEs have to think global also – and in that regard, Mizuho is playing a crucial supportive role for these firms.

“Industrial reorganization and co-existence through compartmentalization with an eye on global markets centering on Asia are essential for Japan to reawaken in the 21st century”

Masanori Murakami, Vice-Chancellor of Kyoto’s Ritsumeikan University

“Our most important role is to introduce overseas business opportunities to Japanese SMEs. We have more than 40 overseas offices in Asian areas. We can offer clients transaction between Japanese SMEs and Asian SMEs.
We have a special, private department that sees to this kind of matching. For the SMEs, we offer excellent financial services needed to get them involved and partnering in overseas activities.”

Unlike other Japanese banks like Mitsubishi and Sumitomo that have informal or overt links to the big industrial giants, Mizuho has no ties that would affect its ability to act as an honest broker and deal facilitator. “Our risk management people are the best. Our underperforming assets are less than 1%,” Mr. Sato says and notes that Mizuho has a specific task force called the Industrial Research Division covering more than 20 different sectors.

“Only Mizuho can have a tremendous amount of information about the strategy of each industry as we are not belonging to some specific Zaibatsu group. We are – in a way – a neutral financial institution, different from Mitsubishi or Sumitomo.  That’s the reason why only Mizuho has this Industrial Research Division.”

The changing domestic landscape has necessitated Japanese companies, both big and small, to look outwards and try to establish a stronger presence in world markets. And with financial services firms like Mizuho behind them, the removal of trade barriers under the TPP and government policy facilitating their internationalization, Japanese companies rejuvenating their business models to go global are set to greatly increase overseas profits.