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A monthly review of the latest developments in Japan’s IT, telecom, and life sciences sectors

July 2004 - Volume VII, Issue VII

Triangle Technologies is the leading Japan Israel business development and investment advisory firm
www.triangletech.com

Dan's Desk

From Triangle's CEO

What to do about acquisitions in Japan? If you are a VC you should read this:

It is still very unusual for Japanese companies (Hitachi, Toshiba, NEC, Matsushita, Canon, Sony etc. the main significant exception is Fujitsu which acquired Amdahl and ICL, quite a few years ago) to acquire technology start ups. This stands in stark contrast to the behavior of Sun, Intel, Microsoft, Cisco, Computer Associates, SAP, J&J, Boston Scientific, and the like who use acquisition as a normal growth and diversification strategy. In Japanese companies, growth and diversification are organic and incremental. By the way, in order to keep up with the US competition, this strategy (combined with the inability to fire people) requires the Japanese companies to be extremely flexible in terms of internal organization - they undergo constant and continuous internal change, much more than their US counterparts.

In part this strategy stems from a social ideology of organizational membership, in which a company is like a family-grouping or tribe (recall UCLA's Bill Ouchi's M-form organization). Typically, you don’t buy and sell family members, and you don’t fire them (this is an oversimplified explanation on several dimensions - of course there are increasing numbers of exceptions, but in reality acquisition and divestiture are still rare compared to their US counterparts. One of the instances in which such reorganization is accepted is when an independent company is bought out, or absorbed, in order to save it and preserve both reputation and jobs).

This leads to two problems for start ups who form strategic alliances with Japanese partners for the purpose of marketing, joint development, or the like, which alliances often include equity investments.

Problem 1 - can the strategic alliance with a Japanese partner be the first step to an exit? The answer is almost certainly, "No." There are very few cases of Japanese companies acquiring their foreign partners, certainly not at attractive valuations.

Problem 2 (and more severe) - what happens to the partnership when the start-up company is acquired? Of course, this depends on whether the acquisition remains independent as a stand alone company, or is absorbed into the buyer. In the latter case, a crisis inside the Japanese partner usually follows. Senior executives can have their career progress derailed because the promised business benefits of the alliance (e.g. increased sales revenues) are not realized. Entire teams of people may be out of work -but since they cannot be fired, the company must find them other positions internally. We heard of one situation in which the start up was acquired (for over $1 bio) and the Japanese partner had to disband a marketing team of 50 people).

There is no clear solution to the above - the capital gains from an equity investment, or conversion of development funding to stock, only partially take the sting out of the loss. Japanese executives always prefer $30 million in hard earned revenues to $30 million (or even $300 million??) in easily garnered capital gains. Likewise, a clause paying back their expenses incurred (through the capital gains) is another alternative, takes the sting away to a limited extent. One of the underlying problems is that if the acquirer would be a Japanese company, there is a reasonable chance that they would try to work out a win-win solution with the pre-acquisition alliance partner. But Western acquirers are the slash and burn types, usually, and simply terminate the relationship without considering the consequences for the existing alliance partner.

Obviously, clear disclosure can also help relieve the sting, and at least it relieves one's conscience, if the seller has one….

Good luck

Dan

***TOKYO WEATHER***

(The Japan Meteorological and other sources) An unprecedented heat wave hit Tokyo on Tuesday July 20th with the mercury hitting an all-time high for the capital at 39.5 C shortly before 1 p.m., topping the previous record of 39.1 C recorded Aug. 3, 1994.

In case you were wondering, the average temperature in Tokyo over the last 30 years has been 25.4C in July and 27.1C in August. At the current rate, we're recording about 5C over the norm. There have been lots of theories about why it seems to be getting hotter in Tokyo -- and most come down to the twin factors of pollution and concentration of population.

In any case, the experts at the Building Research Institute have run models that predict temperatures in downtown Tokyo (Otemachi) at 6:00pm during a hot August day 3-5 years from now will exceed 40C, and by 2031 will exceed 43C. Now, that's a bit too hot.

ISRAEL-JAPAN NEWS

+ ISRAEL IT BUSINESS FORUM 2004 IN TOKYO

The successful event brought to Tokyo the following companies:

Several hundreds Japanese business people came to this two-days event. The first day was dedicated to companies’ presentations as well as to several guest speeches. The second day was for pre-scheduled meetings between the above companies and potential Japanese business partners.
We know of at least one company who met Ten Japanese Companies, some of them are very relevant to its business; more than this; two additional companies approach this Israeli firm following its presentation in the seminar. We would like to thank and encourage the Embassy in Tokyo, Mr. Noah Shani and his hard working team – they did a really good job.

***BUSINESS NEWS***

+TOKYO LOSES BACK-OFFICE JOBS TO FAR-FLUNG REGIONS

(The Straights Times Interactive, July 7th) Unlike in the United States and much of Europe, Japan has not outsourced many of its back-office jobs to foreign countries. Even assuming enough Japanese speakers could be found in Bangalore or Shanghai, business executives argue that people outside Japan would struggle to meet the exacting standards demanded by Japanese customers. Telephone operators, for example, must adopt the stylised keigo language used to deal with clients, an intricate grammatical form that even young Japanese struggle to master.
Yet, almost unnoticed, hundreds of thousands of jobs have been quietly shifted to remote corners of Japan, like the call centres in Hokkaido and Okinawa. The outsourcing boom, only a few years old, reflects two important trends in Japan's economy. First, it is an example of the cut-throat competition. Second, and more fundamentally, outsourcing reflects slow but profound changes in the labour market. As companies seek to cut costs, the rigid job-for-life culture is gradually giving way to a more contract-based system.

+BABY BOOMERS' RETIREMENT POSES PROBLEMS

(Yomiuri Online, July 7th): Japan's postwar baby boomers, dubbed the "dankai" generation, are fast approaching the age of mandatory retirement. This generation's retirement will heavily impact many aspects of the Japanese economy, including labor markets, corporate management, savings and investments. At the end of World War II, as Japanese soldiers returned home from fronts overseas, an unprecedented number of them married. Between 1947 and 1949, about 8.06 million babies were born. This is about 30 percent larger than the population of those born in three-year periods before and after the baby boom.
In 2007, the first group of baby boomers turns 60, marking the start of the generation's mass retirement. The socioeconomic repercussions may be disastrous if Japan is not prepared. The aggregate earned income totalling 7 trillion yen will disappear. Add a concurrent decrease in consumption into the calculation, and Japan's gross domestic product could fall by about 16 trillion yen equivalent to about 3 percent of GDP. With the increase in pension recipients, the central and local governments' fiscal budgets will face a total additional deficit of 4.5 trillion yen.
The negative impacts of the retirement of the baby boomers may be mitigated by some positive ones, such as an influx of 4.3 trillion yen into the economy. Companies' costs will decline as high-salary employees retire and the newly retired boomers--many of them large asset holders--begin to spend some of their disposable income on travel and other leisure activities.

+WORLD'S LARGEST BANK

(washingtonpost.com, Jul 16) Mitsubishi Tokyo Financial Group, Japan's second-largest bank, will effectively take over UFJ Holdings, the fourth-largest, by the end of September 2005. Combined, they will create a bank with $1.7trn in assets, 80,000 employees, and more than 1,000 branches globally -- oh, and $36bn+ in bad debts!

+JOBLESS RATE ACTUALLY HIGHER

(nikkei.co.jp, Jul 10) According to the Shinkin Central Bank Research Institute, the actual unemployment rate for 2003 was more like 6.1%, rather than the optimistic 5.3% announced by the government. The institute says that the government is conveniently forgetting to include in its figures the number of people who have given up looking for work, a group estimated to number about 590,000 people -- mostly in their 50's or who are unskilled.

+JAPANESE CEOS ARE OLDEST

(nikkei.co.jp, Jul 9) According to Booz Allen Hamilton, Japanese CEOs starting their jobs last year were an average 58.4 years old, compared with 49.1 for the USA, 50 for Europe, and 47.4 for non-Japanese Asia. The survey covered the world's top 2,500 publicly traded companies including 356 Japanese firms.

***GENERAL TECHNOLOGY NEWS***

+NEW SKIN MAKES ROBOT SENSITIVE

(Xinghu Net, July 6th) Scientists in Japan are devising an electronic skin that could give robots a sensitive touch, just like human beings. The skin is made from a sheet of rubbery polymer, saturated with flakes of electricity conducting graphite, reported Friday's CRI online. The electrical resistance of the sheet changes when it is squeezed, and this change is detected by an array of transistors beneath the rubber.

+JAPAN, RUSSIA DISCUSS JOINT MARS MISSION

(Yomiuri Shimbun, July 4th) Japanese researchers, who gave up on an attempt to explore Mars last December, have begun planning another probe to the Red Planet in cooperation with Russia.
The first Japanese probe, Nozomi (Hope), blasted off in 1998, but failed to reach Mars because of a malfunction in the main engine, although it did come close to achieving orbit.

+SHARP TO COMMERCIALIZE PAPER-THIN LIQUID CRYSTAL GADGET BY 2007

(Kyodo, July 2nd) Sharp is seeking to develop a liquid crystal display that can be bent as if it were a piece of paper. Liquid crystals do not emit light by themselves, so using them for a display requires putting a backlight mechanism behind the layer of liquid crystals.
But the necessity for such a backlight system has made it difficult to reduce the thickness of the liquid crystal display monitor device. Sharp envisions creating a display that does not require a backlight system by improving the efficiency of light reflection associated with a liquid crystal monitor, they said.

+FIRST DUAL NETWORK FOMA HANDSET N900IL

(Yahoo, July 15th) The Wi-Fi Technology Forum and NTT DoCoMo announced development of the "N900iL," a dual network 3G FOMA® handset that runs on both FOMA and wireless LAN networks. The handset, which is scheduled to be marketed in Fall 2004, has been specifically designed to support the new PASSAGE DUPLE™ system that was developed by DoCoMo to integrate the two-network operation.
Under the PASSAGE DUPLE system, the N900iL may be used as a standard FOMA handset, as well as an in-house VoIP phone utilizing a company's internal wireless LAN network. The dual-network solution targets corporate users, and will be marketed through DoCoMo's corporate business division and partner companies.

***LIFE SCIENCES AND ENVIRONMENT NEWS***

PHILIPPINE NURSES TO COME TO JAPAN?

(TT commentary from nikkei.co.jp, Jul 11) The Philippines has said that it is ready to accept Japan's requirements that Philippine nurses and nursing care providers should gain Japanese licenses before working permanently in Japan. Currently nurses and nurse aides can only work as unskilled labor, strictly controlled and must leave the country after no more than 4 years "Training". A new agreement being worked out between Japan and the Philippines, Thailand, and possibly later with Malaysia and South Korea, could allow Japan to start opening up its labor market to nurses and nursing care specialists.
The issue of nurse aides is becoming increasingly important due to the ballooning number of bed-ridden elderly in Japan. According to the Ministry of Health there were about 1.2m bedridden elderly people ("Netakiri") in Japan in 2000, and around 1.4m by next year -- that's more than 1% of the population!