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The rebirth of Japan Inc.

Article - August 21, 2017

Prime Minister Abe is pushing forward policies in an effort to open up the country’s economy to the global market. Japan Inc. is following suit with an aggressive strategy to go global through M&As and strategic partnership and by diversifying their business portfolios

The challenges facing Japanese firms on a global scale can be directly linked to domestic concerns that the government is tackling through the policies of Abenomics; to pull the country out of two decades of economic stagnation and to address the problems posed by Japan’s aging and shrinking population.

Faced with increasing competition within the ASEAN region and hampered by a shrinking market domestically, Japanese firms are looking increasingly to the United States and other international markets to gain a foothold in a fast-moving globalized panorama. Japan has been slower than other nations to fully embrace trade on a global scale, having traditionally relied on a robust internal market and the appeal of the Japanese brand abroad to foreign consumers who associated the ‘Made in Japan’ hallmark with manufacturing quality and technological innovation that simply wasn’t attainable other than through Japanese household name companies.

Today, U.S. and European firms have stolen a march on their Japanese counterparts in terms of  Internet products and platforms and globally have all-but cornered the market to the detriment of Japanese providers, who have fallen foul of a tendency among the country’s big-hitters in various sectors to overly rely on internal demand to keep their balance sheets healthy.

Domestically, Japanese firms are shifting away from quantity – which has become the sole preserve of massive operations in neighboring China – and returning to the core principles that initially placed Japan at the forefront of global innovation advances. One such example is HORIBA, a tech company that applies its expertise in chemical analysis to a broad range of industries.

The company provides an extensive array of instruments and systems for applications ranging from automotive R&D, process and environmental monitoring, in-vitro medical diagnostics, semiconductor manufacturing and metrology. Proven quality and trustworthy performance have established widespread confidence in the HORIBA brand around the world.

“The guiding principle today is: no more mass production, but a strong focus on customization and high quality,” says Atsushi Horiba, the company’s Chairman, who underlines the value of local operations and cooperation to achieve a global outlook: “The point is that globalization requires localization. Without localizing, we cannot be a global company. We cannot by ourselves define all market requirements in different countries across the world. That’s why our strategy focuses on developing fruitful collaborations and expanding globally through M&A activities. In this way, we are able to provide our unique know-how and technology and customize it according to different market requirements”

Japan’s population decrease and the knock-on effect on the number of working age residents is already affecting domestic consumption and the national market is being flooded with cheaper and cheaper goods as lower production costs and technological advances – not least among Japan’s neighbors – gives young Japanese a previously impossible range of choices when it comes to retail, food and electronics purchases.

Left: Suguru Miyake, President, Nihon M&A | Center: Kazuhiro Kashio, President & COO, CASIO | Right: Atsushi Horiba, Chairman, HORIBA

The strength of the ‘Made in Japan’ brand is still a hallmark of quality Japanese goods today that are more likely to conjure images of avant-garde technological innovation, projected on to the world at large like the colossal digital HD billboards that characterize Tokyo’s iconic thoroughfares. It is exactly that singularly Japanese love of pushing the boundaries of technological possibility that Japan Inc. is banking on to re-establish its place at the international top table.
Underlining Japan’s penchant for the eye-catching avant-garde, the first hotel with robotic staff recently opened its doors in Nagasaki. A gimmick perhaps? Not exactly; or at least not entirely. Although the low-cost Henn-na hotel is slightly reliant on the novelty factor it is also attempting to address a serious issue in Japan; the sheer cost of maintaining the country’s vast industrial activities will continue to rise exponentially while the working population decreases and taxes inevitably increase in turn. The hotel is a logical expansion of robotic arms on automobile production lines and virtual assistants such as those in the Tokyo branch of the Bank of Tokyo-Mitsubishi and the robots who guide visitors around the capital’s National Museum of Emerging Science and Innovation.

Of course, these applications have far more serious practical purposes and none more so than in managing natural disasters and preventing the full extent of their consequences, while also providing the backbone for Japan’s next major international showcase, the 2020 Tokyo Olympic Games.

Chairman and CEO of the Kanamoto Group, Kanchu Kanamoto, explains: “In the construction industry, which is the Kanamoto Group’s main area of operations, earthquake restoration works and disaster counter-measure works in various regions are ongoing. Work has also begun on two major projects, the 2020 Olympics and Paralympic Games to be held in Tokyo and the Linear Shinkansen to link all the sites together.’

As Mr. Kanamoto notes, bringing such huge projects to fruition requires partnerships, and Japanese companies are striving to enter into agreements with international companies with the potential to expand upon and complement Japanese technological knowhow. ‘In the case of Kanamoto, foreign shareholders hold 27% of our shares, which gives us a great opportunity to hear global opinions from different perspectives. We are looking forward to increasing this percentage. The successful results from all our operations are due mainly to our various M&A initiatives. We anticipate more and more companies will work with us in this way in the future; mergers and acquisitions are not a common practice in Japan. However, over the past five to six years, changes in mindset have been ongoing.’

Among a new wave of business practices prevalent in Japan are two aimed specifically at merging national industry into the global marketplace, by encouraging firms to open more places on their boards of executives for foreign members and by promoting the use of English – still an unspoken frontier in many walks of Japanese life – as a second language at all levels of corporate operations to facilitate smoother communication with international partners and clients. Much like Mr. Kanamoto, Mr. Horiba also sees the value of opening up to global opportunities: ‘More than 60% of our employees are foreigners. Our focus is to continuously develop new added value for our customers. This is the philosophy of what I like to refer to as the “Kyoto way”. I truly believe this is also the future of Japan.”

According to a Trading Economics report published this year, Japanese exports enjoyed an increase of 11.3% year-on-year to 6,346.5 billion yen in February of 2017, exceeding expectations of a 10.6% rise. Boosted by sales of machinery (16.6%), electrical machinery (13.5%), chemicals (16.4%), automotive parts (21.8%), manufactured goods (6.7%) and scientific and optical instruments (23.4%), shipments increased to the U.S. by 0.4% and to China – which requires Japanese expertise to keep the country’s massive production lines churning – by 28.2%.

However, as Dr. Mamoru Kadokura, President of chemical manufacturing giant Kaneka Corporation, points out; ‘Abenomics is only focusing on the domestic market while many companies like Kaneka, Toyota, Sony and Honda are earning money outside of Japan. Therefore, it should also involve a philosophy of growth abroad. It is still very domestically oriented while lots of Japanese companies are making their profits in overseas markets and bringing back dividends and profits that contribute significantly to the local economy. So far, Abenomics has not really provided proper support for outward-looking businesses and this is essential to be competitive on the global market.’

For Japan in today’s climate of globalization, the only way of remaining competitive is to continue along the current path of expanding into niche markets and rapidly growing high-tech areas.

One company making strides to diversify into other areas is Fujifilm. Globally renowned for its photographic products since its inception in 1934, Fujifilm has now expanded into fields including biomaterials, industrial products, and healthcare.

Left: Yuzo Toda, Senior Executive Vice President, Fujifilm Corporation | Right: Dr. Mamoru Kadokura, President, Kaneka

As Yuzo Toda, Senior Executive Vice President of Fujifilm Corporation; “When we lost our film business, we realized that we had to apply the expertise derived from years of experience in the photographic industry. IoT is playing a big part in Fujifilm’s healthcare division based on the technologies and know-how we have already acquired. Fujifilm founded our Informatics Research Laboratory in April 2016 to reinforce our fundamental information technologies. We have been applying these technologies in business products already across our diversified business areas. The Informatics Research Laboratory will work at cross business and provide new landscape, in other words, it will create new value.”

In a fast-changing business environment, where new technologies are appearing at an ever-increasingly rapid rate, Fujifilm and its competitors have had to adapt to avoid the shutter coming down permanently on their growth. As Mr. Toda notes: “Color photographic film technology is so complicated that only three companies in history survived aside from ourselves: Kodak in the U.S., Agfa in Germany and Konica in Japan.”

Today, Fujifilm is targeting the healthcare sector to become the flagship product of a bold new company, focusing on prevention, diagnosis and treatment, including exciting new technologies to be rolled out in medical imaging systems for diagnosis, pharmaceuticals and regenerative medicine. “We will change the game in new fields with our proprietary technology, which is rooted in the photographic business,” adds Mr. Toda.

“For us to have our products on the U.S. market implies that we have to give them the latest technology available at a reasonable cost to face the competition. In the US healthcare market, we market medical diagnostic systems such as digital radiography, ultrasound and medical informatics and we will continue to provide innovative products, particularly in the fields of cancer, diabetes and central neurological disease, where new innovations are eagerly being awaited. We are already conducting clinical trials in the U.S. to develop innovative drugs to cure cancer and Alzheimer’s disease.”

Japan’s automotive industry is another sector that has taken the lead in implementing measures to continue to drive growth internationally. In 2015, the most recent year for which figures are available, Japan ranked second in terms of global car exports, behind only the German juggernaut; in total, Japanese exports accounted for 12.8% of the worldwide total, exporting $86.1 billion worth of vehicles and outstripping the United States by more than 4.5%. Much of Japan’s success has been in tapping emerging markets in Central and South America and taking advantage of favorable tariffs in Mexico under the North American Free Trade Agreement; Nissan Motor Co., Honda Motor Co. and Mazda Motor Corp. all opened plants in the U.S.’s neighbor state in 2014.

The recently elected U.S. President’s views on free trade provide a fresh latent threat to Japan’s automotive industry but there is one card tucked in the sector’s sleeve that even the most powerful man on earth will not easily trump; Nexty Electronics, a new company resulting from the merger of Tomen Electronics and Toyota Tsusho Electronics, is planning a quiet revolution in driving technology. “IoT (the Internet of Things) will have a major influence on the automotive industry,” Mr. Takashi Ishibashi, Chairman of Nexty Electronics, explains of his company’s advances in Artificial Intelligence for self-driving cars, with which Nexty aims to expand into the U.S. market with innovative and sustainable solutions.

“The difference between companies that nowadays enjoy a dominant market share and the ones that do not is that the leaders have unique technologies. Japan in particular has the mechanical knowhow. All the companies that lost their market shares to foreign companies are component-based companies, which means that any company can simply copy their product. Mechanical knowledge and technologies are unique and help companies to be successful. Technology cannot be copied so easily. This kind of unique technology pioneered by Japan is what is helping the country to be a leader, along with the mechanical knowhow that will continue to be enhanced in order support even more growth in the future.”

If you can’t beat them, buy them, or at least do business with them, is the new byword in Japanese expansion. Mergers and acquisitions, as pointed out by Mr. Kanamoto, are increasingly becoming the favored manner among Japanese companies to increase their overseas market share. Financier Worldwide reported a record $82 billion outlay on international acquisitions by Japanese companies in 2015 (the most recent available figures) and one of the most eye-catching tie-ups in recent years took place between Nippon Steel Corp. and Sumitomo Metal, a marriage that led to the resultant company becoming the world’s third-largest steel producer by volume in 2015.

“When we talk about high-end steel-based products, the price of the product does not matter as long as the technology quality is excellent. However, we continue to strive towards being able to compete against Chinese, Korean, Taiwanese or other steelmakers to be able to keep our cost competitiveness in line with these countries even for the high-level products that we produce,” says Kosei Shindo, President of Nippon Steel and Sumitomo Metal Corp.

“However, our R&D is solely conducted in Japan. There are two reasons for this: firstly, the highest technological demands made by customers due to their technological needs means we need to be very close to their R&D people and centers to be able to provide competitive services. Secondly, we believe that the concentration of facilities and human resources increases our efficiency in research and development. Of course, this does not mean that we are not interested in international collaboration regarding R&D: we dispatch our researchers either to universities or R&D facilities overseas. This is how we achieve international collaboration.”

This is a viewpoint shared by Dr. Kadokura of Kaneka Corporation, whose company had its revolutionary Lixelle Column system, used in the treatment of HIV, arthritis, high cholesterol and ulcerative colitis, approved by the U.S. Food and Drug Administration in March 2015.

“Kaneka is connected to the world: we are determined to become a truly global enterprise with diverse human resources working together on a global scale. Our presence will be felt in markets around the world, including newly emerging ones. We have recently opened the Kaneka U.S. innovation center, in Silicon Valley near San Francisco. This will be the new base for us to do R&D and a wonderful occasion to deepen our collaboration with American people, institutes, embassies and industries.”

“Japan is a bit isolated,” admits Suguru Miyake, President of Nihon M&A, highlighting another challenge facing his country in the global marketplace of the 21st century. “One way to deal with that isolation is to strengthen ties with the U.S. but also with surrounding Asian countries, which is where future growth is going to be fueled. As an M&A firm we are positioned to facilitate this trend and we intend to cooperate in that process.”

Aside from its merger and acquisition brokerage business, Mr. Miyake says the company is also supporting Japanese SMEs to reach global markets, as they bid to catch up with larger Japanese firms.

“The largest companies have already positioned themselves on medium and long-term growth retro-planning abroad. However, the small and medium-sized companies haven’t been able to do any preparation and we are currently considering joining these small and medium companies in their expansion around Asia,” he says.

While Japan realigns itself with the ebb and flow of the global economy, Kazuhiro Kashio, President & COO of electronics giant CASIO, stresses the importance of building the country’s future on the successes of the past and not on the shifting sands of short-term fortune.

“I strongly believe that the strength of Japanese companies lies in monozukuri. What overseas markets and players value about Japan’s manufacturing is the high quality of the products we produce. Today, however, Chinese and Korean companies can manufacture products of a certain quality. Japanese companies have to compete against Chinese and Korean companies in terms of price; and the nature of markets is also changing.

“What Japanese companies have done to remain competitive is to launch products of true quality and value. So, what they can do in this context of IoT is to continue producing consumer electronic goods of authentic quality. By doing so, we believe we can establish a direct connection between manufacturers and end-users.”

Monozukuri, to which Mr. Kashio alludes, lends its name to the innate talent of the Japanese for making things – a more or less literal translation of the word, although craftsmanship is perhaps a better description. From the invention of ceramics during the Jomon period to the modern-day application of technology to robotics, food sciences, manufacturing and medicine, whatever Japan turns its hand to ultimately has an effect on the world at large.