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Drawing upon
shared traditions and values, the Japanese people joined together following
the Second World War to pursue the goal of rapid industrialization.
Employing a consensus-oriented approach, industrial leaders and commercial
banks worked in coordination with bureaucrats and politicians to develop
a manufacturing capacity that became the envy of the world.
With success, however, came new challenges. Lower-cost competitors
followed in Japan’s footsteps, and reinvigorated U.S. and European
firms -- who rationalized their operations and adopted many Japanese-style
practices -- began to present serious competition.
Japan suddenly found itself squeezed on both sides. The cradle to grave
progression funded by policy-based commercial lending – which
had so brilliantly transformed Japan into the world’s second
largest economy – now acted as a constraint. The Japanese people,
however, believed their problems were only temporary and were reluctant
to allow the painful economic and social adjustments necessary to restore
efficiency and competitiveness.
By the mid-1990s, however, Japanese leaders recognized the need for
comprehensive change. The “Action Plan for Economic and Structural
Reform” was adopted in 1996 to introduce greater flexibility
as a means to address inefficiencies and the high cost of doing business
in Japan. Dramatic progress has been achieved through deregulation
of Japan’s financial markets and other industrial and consumer
sectors. A new commercial code and more flexible labor practices have
been introduced, as well as more efficient and transparent accounting
and corporate governance regulations and other policy innovations.
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Japanese
firms continue to develop new products, maintaining an R&D commitment
reported by the Nihon Keizai Shimbun to total approximately $74 billion
in the current fiscal year – a 3.9% increase over FY2002 --
the fourth consecutive annual increase. Furthermore, the Financial
Times reports Japanese firms hold 6 of the top 10 international company
R&D budgets in the electronic and electrical industries, as well
as 4 of the top 10 positions in IT hardware and engineering, and
3 of the top 10 in automobiles & parts and chemicals.
- Japan
is a Global Leader in Mobile Telephony and the Wireless Internet
While
Internet activity in the U.S. is primarily driven via computers,
the average Japanese user is more likely to obtain access through
cellular handsets. As a result, Japan has become one of the world’s
most vibrant mobile telecommunications markets. With approximately
109 million Japanese citizens over 15 years of age, the Japanese
Telecommunications Carriers Association estimates there were 74.4
million cellular and 61 million mobile Internet subscribers in
Japan as of February 2003.
The 1999 introduction of iMode service by NTT DoCoMo set off the
dramatic growth seen in recent years. Customers use iMode for a
wide variety of purposes including receiving news and stock prices,
e-mail, shopping and banking online. iMode technology is also used
in car navigation systems to provide traffic news, weather forecasts,
parking updates and other services. At one point up to 50,000 subscribers
were signing up to use this service every day.
iMode succeeded -- not only in incorporating Internet access within
mobile telephony -- but also in charging for content. It uses a
unique micropayment system that DoCoMo (and other carriers who
have developed similar systems) are now introducing around the
world. Following its success, DoCoMo introduced IMT-2000 (FOMA),
the next-generation cell phone service in October 2001. It enables
the transmission of moving images and other new services.
Japanese companies and government agencies are now developing the
products, tools and infrastructure needed to develop this exciting
new communications medium. Wireless transmission speeds are increasing
at an amazing rate, with the current goal being to achieve 480
Mbps wireless Internet access by April 2004.
Taking advantage of this added bandwidth, NEC recently developed
a mobile phone that can receive digital TV broadcasting. Japan
plans to introduce terrestrial digital TV broadcasting service
this December in pilot areas including Tokyo, Nagoya and Osaka.
Within several years, it is hoped programs will be developed that
specifically target portable terminals. This will allow receipt
not only of digital TV programs, but also integrated services including
image, voice, sounds, data and other mobile applications.
Other interesting applications include a security system launched
by Total Life Service Community, a building maintenance company
in cooperation with Matsushita and Sanyo. It transfers images through
an interphone camera system installed at home to subscribers. Another
service will be launched by Secom, Japan’s largest security
service. It transfers visitor’s calls to a cellular phone,
giving the impression a home is occupied. A similar service allows
users to monitor pets and small children through phones or computers.
The Japanese experience offers many insights in how mobile communications
are changing human communications patterns. Two International University
of Japan Professors, Philip H. Sidel and Glen E. Mayhew recently
published
an informative report which provides
comprehensive insight into how Japanese consumers are utilizing
this emerging
medium.
- Japan
Catching-up and Surpassing the U.S. in Many Broadband Applications
Japan has lagged the U.S. and many other markets in terms of Internet
penetration, yet is rapidly closing the gap through low-cost broadband
service. At a cost of approximately $20 a month, it is not only
significantly less expensive than what is offered in the U.S.,
but includes a broad range of services relatively unknown in American
and European markets. The Wall Street Journal recently noted Japan
had 11.8 million high-speed subscribers as of August, up more than
sevenfold from 1.6 million two years ago. This penetration rate
of almost 10% -- is now similar to the U.S. Broadband service is
faster in Japan as well. The Wall Street Journal reports “An
album’s worth of music might take five minutes to download … in
the U.S. In Japan, some services … zap the data … in
16 seconds – and the monthly fee would still be half the
U.S. rate.
The potential is huge. Mitsubishi Research Institute estimates
Japan's broadband content market could be worth $6.4 billion by
2005. This is a sharp jump from the $1.5 billion seen in 2002.
Japan’s Ministry of Posts and Telecommunications provides
an even more optimistic estimate, forecasting demand for broadband-related
goods and services could be as high as $90 billion by 2007.
One application available to Japanese subscribers is the new BB
Games portal, which Softbank launched last summer. According to
Businessweek players can challenge others across the country for
a monthly fee of $8.50 to $13 per title. Businessweek reports Softbank
plans to offer up to 300 games by year-end 2004 -- with annual
gaming revenues of at least $400 million by 2006 Softbank also
believes E-learning and videoconferencing show great promise. Investors
seemingly endorse Softbank’s broadband approach -- as its
shares have appreciated dramatically over the past three months.
To further develop broadband capabilities, Japanese engineers are
now moving to validate the utility of IPv6 – the next generation
Internet protocol. It will be used in computers and communications
products as well as networks and other applications. Major characteristics
include: a) 128-bit IP addressing (compared to 32-bit in the current
IPv4), providing for a dramatic increase in the number of networks
and systems; b) network security reinforcement, and c) bi-directional/prioritized
data transmission.
Several Japanese firms are already launching products that link
current standards with IPv6. NEC now offers image distribution
systems. Hitachi markets software and equipment to facilitate the
development of proprietary networks. Fujitsu is also planning to
launch a system connecting current Ipv4 protocol with the next-generation
standard. The Nikkei Weekly estimates combined annual sales of
Ipv6-related products at these three firms to be ¥100 billion.
- Japan
Also Remains a Strong Contender in Other Emerging Information
Technologies
Japanese firms have been very active in the development of LAN
technology. New applications include home-based servers and telephones
that communicate with computers and make payments to vending machines.
Other products include cameras and appliances that utilize wireless
functions to transmit images, instructions and data. For example,
Hitachi Home & Life Solutions recently announced plans to market
seven Internet-enabled home appliances that allow users to send
instructions via cellular phones or computers by next spring.
To develop the protocols that will enable the operation of multiple
appliances via a single remote control, more than 100 home electronics
and telecom firms – including Matsushita, Sharp and Sanyo
as well as Microsoft and IBM Japan – recently announced plans
to team up with the government-affiliated Communications Research
Laboratory to devise a uniform standard.
Japan has also demonstrated real leadership in the development
of RF tags and RFID (Radio Frequency Identification) microchips
and the standards that will allow common, everyday objects to be
embedded with computer intelligence. These "smart" objects
are integral to the emerging field of “ubiquitious computing”.
It will allow these devices to communicate on a continual real-time
basis, promising innovations in fields including, but not limited
to, security, logistics, marketing and inventory control.
Japanese achievements in this area have resulted from the work
of Dr. Ken Sakamura of Tokyo University -- who first developed
TRON or "The Real-Time Operating System Nucleus" in 1984.
TRON has become the operating system driving most embedded systems
in Japan and promises to provide worldwide standards for this emerging
industry. Dr. Sakamura’s work has given rise to the TRON
Association, an
industry consortium with over 200 members. In a major step forward,
Microsoft announced last month it will work
with TRON to develop an operating system for network appliances.
As Microsoft Senior Vice President Susumu Furukawa noted in a Nikkei
newspaper interview “By combining with TRON, Windows CE can
devote itself to aspects of control on the display screen that
are closer to the user. We also have computers for the car and
digital appliances in mind”.
- Biotechnology
Constitutes Another Source of Potential Growth
According to the Japan Patent Office, Japan presently holds about
20% of worldwide biotechnology patents, compared to 21% for Europe
and 52% for the U.S. Large companies tend to dominate this sector
in Japan, accounting for about 76% of all filings. In contrast
universities lead in the U.S. with 53%.
Japanese Biotech-Related Market (2002)
Biotechnology
research in Japan is built on a broader base than the U.S. and
Europe. A far greater number of patent filings have to do with
chemicals, agriculture and food, machinery and other sectors as
opposed to pharmaceuticals, which dominate in the U.S. and Europe.
Pharmaceuticals do, however, account for slightly less than half
of biotech revenues in Japan. The Nikkei BP reports nearly $5 billion
in pharmaceutical sales, including erythropoietin or EPO (20%),
monoclonal antibodies (11%), interferon (11%) growth hormones (10%),
insulin (8%) and other areas (41%). Agriculture and foods constitute
the next largest category, totaling $2.7 billion. This includes
maize (44%), corn (15%), granule (11%), rapeseed (11%), cotton
(6%), flowers (4%) and others (9%). EPO is used for the treatment
of anemia associated with end stage renal disease.
Chugai Pharmaceutical Co Ltd., which is now a member of the Roche
Group, one of the leading pharmaceutical companies in Europe, currently
controls about two thirds of Japan’s EPO market. This has
been achieved through sales of a product manufactured by Genetics
Institute, a US firm. An alliance between Kirin and Sankyo Pharmaceuticals
accounts for almost all of the rest through sales of an Amgen product.
This demonstrates the network of alliances and relationships between
foreign and Japanese large companies that have allowed these leading
companies to effectively penetrate and profit from the growing
market in Japan for biotech products.
While Japan lags the U.S. in terms of pure biotech firms, there
has been a dramatic increase in since 1999. Close to half of the
firms that commenced operations during this time were created through
spin-offs from larger companies, and another 25% from universities.
This is an encouraging trend, and is expected to continue given
increased labor and business flexibility and the steady growth
of this sector.
To promote a more robust biotech sector the Japanese government
is providing facilitated access to funding and encouraging closer
cooperation between universities and the private sector. National
Research Institutes became independent agencies since 2001 and
most national universities will adopt similar status during the
next fiscal year. This is likely to allow more effective commercialization
of patents and encourage a more entrepreneurial orientation.
Japanese universities have also begun to allow professor’s
to have side jobs and to increase their consulting activities.
Over 300 University start-ups have been established to date, as
well as 32 technology-licensing organizations (TLO) and incubators
to enhance the application of academic research. Two success stories
include the September 2002 $32 million IPO of AnGes MG Inc. and
TransGenic, Inc. last December. These are the first two publicly
traded venture firms in Japan to have been launched by university
researchers.
Japanese financial institutions are also enhancing the environment
for industries that rely on patents. In the largest lending backed
by intellectual property in Japan, Tomen Corp. affiliate Arysta
Life-Science Corp. has used its agrochemical patents as collateral
for a ¥35.5 billion syndicated loan from the UFJ, Sumitomo
Mitsui, Aozora and Sumitomo Trust banking groups. Mitsubishi Trust
is also launching a program allowing companies to place dormant
patents in trust accounts where the beneficiary rights will be
sold to investors.
The Japanese government is also moving to enhance biotech activity
through the establishment of industrial clusters. The Tokyo
Area Genome Network unites 7 prefectures and cities
to encourage genome analysis by government affiliates and universities
including RIKEN,
AIST and Tokyo University. The density of pharmaceutical and food
companies in Osaka provides another natural base for an industrial
cluster. Additionally, the Kobe Medical Industry Development
Plan promises innovations in tissue
engineering. Other clusters are
being launched in Hokkaido, as well as Tokai,
Toyama, Shikoku, Hiroshima and Fukuoka. One recently announced
Kobe-based program
consists of an effort by Takeda Chemical Industries and nine other
drugmakers in cooperation with the Translational Research Informatics
Center. It will conduct research on treatments customized to the
unique genetic makeup of individuals.
The exciting potential for Japanese biotech development is seen
in the growing number of dedicated bio-oriented venture funds,
many of which are highlighted in the table above.
- These
Growth Areas Constitute the New Frontier for Achieving Success
in Japan
Some
observers point to the preponderance of value-oriented and restructuring
deals in Japan and view this as evidence it is not possible to
initiate transactions that focus on new technologies or growth-oriented
businesses. While it is true the large-scale deals that have attracted
most media attention have been those involving distressed assets,
this is certainly not the case.
Many Japanese firms are actively dedicating themselves to developing
the global networks and product lines necessary to enhance their
competitiveness. They are coming to understand this entails greater
outreach and linkages with entities outside of Japan. As a result,
we are likely to see an acceleration of the number of cross-border
investments, mergers and acquisitions and other business and financial
arrangements that characterize successful global enterprises.
Furthermore, it is important to recognize the move toward a greater
emphasis on foreign investment is a relatively new phenomenon in
Japan. It should therefore be no surprise that initial movement
has been in the value and distressed area where there is a greater
need for immediate solutions. Japanese executives and government
leaders are, however, watching the success of the transactions
that have been achieved and it is simply a matter of time before
similar movement is seen toward more foreign involvement in the
growth areas highlighted above.
One can observe this trend in the activities of private equity
firms. Ripplewood, for example, recently shifted from an initial
emphasis on troubled financial institutions such as Shinsei and
leisure resorts such as Seagaia, to their most recent investment– the
$2.4 billion acquisition of Japan Telecom’s fixed-line telephone
business as well as other sectors where Japan has traditionally
defined its core competitiveness.
Recent comments by Ripplewood CEO Timothy Collins in the Financial
Times provide additional insight. Collins noted “There is
no limit to our appetite to investing in Japan”. The Financial
Times reports Ripplewood is now looking at opportunities in chemicals,
foodstuffs, branded services, consumer electronics and appliances.
Collins further stated “There is clearly a change in the
business culture – people realize they have to make profits.
[Japanese companies] see … we are going to be part of the
solution, not a thief trying to steal their family jewels.”
As Japan continues to open up and reform its economy, and further
progress is seen in its efforts to achieve a sustainable economic
recovery, U.S. corporate and portfolio investors would be wise
to maintain a closer look at the world’s second largest economy
and the many interesting opportunities that are beginning to emerge.
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November
11, 2003