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

June 2003 - Volume VI, Issue VI

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

Dan's Desk

From Triangle's CEO

+HOW TO WRITE A BAD DISTRIBUTION AGREEMENT

You know, at Triangle we are finishing off a couple of distribution agreements (DA) this week and this has caused me to mull... there are such big cultural gaps here. As my negotiation counterpart (I have known him a long time) told me at a break, "you know, we never have lawyers in our negotiations. It is expected that the business managers do the negotiations and understand everything. We have law firms we use, but on occasion we just ask them, 'do you approve this particular sentence?' and they say yes or no. Almost always we know in advance how they will respond. Lawyers don't matter very much in these contract discussions."

You probably have heard - there are ~50 times more lawyers in the US than in Japan. Factor in the fact that it is a social norm in Japan for business disputes to be handled between businessmen, not lawyers, and we can guess that the probabilities of any legal action between supplier and distributor in Japan are anywhere from .01 to .001 of the probabilities in the US.

What difference does that make for DAs? Well, since the underlying principle of drafting legal contracts is how the courts will interpret the obligations of each party (mine is obviously a non-lawyer's perspective), this principle is largely irrelevant. Yet it colors the tone and wording of the DA to the point where a substantial percentage of the distribution may be misrepresentative, irrelevant, and/or counterproductive when viewed from the perspective of the Japanese business culture.

Here are just a few of the problems: (I use the term customer and distributor interchangeably)

1. The manufacturer thinks that he is God - whereas in Japan the customer is God - so the point of reference for the DA is how to protect the manufacturer, and not how to provide service to the customer. The customer has many obligations, and the manufacturer has many rights, and avoids as many obligations as possible, such as delivering a product on time. Or fixing any problems, or making a flawless product...

2. This reflects itself in language that sounds very bad if your perspective is that the customer, not the manufacturer, is God. The manufacturer has "sole and absolute discretion." "Sole" is not enough, we need to be "absolute" as well - as in absolute ruler, or absolute power, or absolutely in control. Not like Absolut vodka...

3. The customer must prove himself in many ways. Even if the customer is Toshiba or Sony, it must warrant that it is a company in good standing, will not go bankrupt, will obey the laws, etc....

4. The manufacturer avoids mention of "mutual discussion", or "good faith," or "will inform in advance", or anything that smacks of cooperation, mutuality, shared control.

When viewed from the perspective of a non-litigious, hierarchical (customer is god) business culture, the typical DA is shockingly contentious and adversarial to most Japanese executives, especially those who are uninitiated in the ways of the foreigners. Be aware of that, and soften the tone, smooth over the rough edges. You will benefit from a more comfortable, satisfied, and motivated business partner.

Good luck

Dan

***ISRAEL-JAPAN NEWS***

+TEVA ALLIES WITH EISAI TO DEVELOP PARKINSON’S DRUG

Teva Pharmaceuticals (Nasdaq: TEVA) has announced that had it entered into an alliance with Japan’s Eisai Co. for the global co-development of Teva's rasagiline drug and its co-promotion in the US market. The parties will initially develop the drug for Alzheimer's disease and will also co-promote it, once it is approved by the FDA, for Parkinson's disease.

+ PEGASUS TECHNOLOGIES RECEIVES FUNDS FROM KOKUSAI CAPITAL, PENTEL

Pegasus Technologies, a provider of handwriting input applications for PCs, PDAs, and mobile phones, has raised an undisclosed amount of financing from new investors Pentel and Kokusai Capital. Hitachi and Vertex Israel also back Pegasus.

***BUSINESS NEWS***

+MORE THAN 7M AGED HOUSEHOLDS

According to Japan’s Health Ministry, there are now more than 7.16 million households with people aged 65 or over, about 17% of all households in Japan. This is seven times the figure first recorded in 1975. In contrast there are 12.8 million households with school-aged children, down 2.7% over the previous year.

+GOVT. TO CONSIDER CHANGING NTT FIBER-OPTIC LINE RULES

The Japanese government has declared that it might relax the obligations it has put NTT Corp.'s regional operators to open up their fiber-optic lines to other companies. Newer carriers oppose the move, saying that it will lead to an NTT monopoly in the fiber-optic line business.

+BROADBAND SUBSCRIPTIONS CONTINUE TO SURGE

Japan's broadband access providers had about a total of 9.96 million subscriptions at the end of April with a monthly increase of about 563,000. The growth marks a 2.3-fold jump from the year-earlier level and is certain to have surpassed 10 million during May, according to a survey by the Ministry of Public Management, Home Affairs, Posts and Telecommunications.

+JAPAN SEES BROADBAND USERS TRIPLING BY 2007

Japan's Telecoms Ministry projects that 60 million Japanese - about half the population - will be using broadband networks by 2007, up from about 20 million today. A draft of the ministry's telecommunications white paper for 2003 also forecasts revenues from domestic broadband services would surge to $86.4 billion over the same period, or five times the current level.

+JAPAN IP PHONE USERS SEEN GROWING 73% IN 2003

The number of users of cut-rate IP phones in Japan could expand by up to 73% this year, further squeezing profits of conventional fixed-line carriers, this according to Yano Research. Japan would have about 5.3 million IP phone users at year-end, up from 3.1 million in 2002. Yano Research said the number of IP phone users could grow to as much as 27.9 million by 2007.

+JAPAN 3G USERS TO INCREASE EIGHTFOLD BY 2007

The number of subscribers to 3G mobile phone service in Japan is likely to grow more than eightfold in the next five years on the back of aggressive expansion by carriers, according to IDC Japan. Users of 3G service are likely to reach 69 million in 2007, up from about 8 million at the end of last April, or over 700%. Market share for 3G is expected to grow to 77.6% of the total cellphone market, compared with 10% at the end of April. IDC expects user migration to pick up speed in the second half of 2003 with KDDI launching an advanced 3G service and DoCoMo increasingly focusing resources on its 3G operation.

+KDDI LEADS RIVALS IN MAY SUBSCRIBER ADDITIONS

Japan’s 2nd-largest wireless operator KDDI led its rivals in customer additions in May, adding 162,000 customers to a total of 18.23 million. KDDI’s customer growth included 523,700 customer additions to its ‘3G’ service, offset by the loss of 361,600 2G customers.

+DOCOMO TO TRANSFER ALL 2G USERS TO FOMA BY 2010; SEES 6M USERS IN 2005

NTT DoCoMo will switch its business focus to the FOMA 3G service within 2 to 3 years, with the ultimate aim of transferring all of its mobile phones to 3G by 2010, according to newspaper sources. The firm hopes to raise the ratio of 3G users to about half of its total mobile phone users in about two to three years. DoCoMo said it expected 6 million 3G users by March 2005.

+CELLPHONE RING-TONES BRING $59.3M IN COPYRIGHT FEES

In fiscal 2002, ring-tone copyright fees paid to songwriters in Japan soared to about $59.3 million, nearly double the amount recorded in fiscal 2001, this according to the Japanese Society for Rights of Authors, Composers and Publishers (JASRAC). Since fiscal 1999, revenue from ring-tone copyright fees has increased more than 20-fold. An estimated 110 million melodies were downloaded directly from online distributors each month in fiscal 2002.

***GENERAL TECHNOLOGY NEWS***

+HITACHI MEDICAL, UNIVERSITIES TO STUDY TOOTH REGENERATION

Hitachi Medical Corp. has announced that it would start research into tooth regeneration with 5 Japanese universities. The company has launched a consortium on tooth germ regeneration, in which Nagoya University, Niigata University, Osaka University, the University of Tokushima and Kanagawa Dental College are participating. The company aims to start shipping out cultivated tooth germ in 2007 and to secure annual sales of more than $84.7 million by 2010.

+KYOTO UNIVERSITY INSTITUTE GROWS JAPAN'S FIRST ES CELLS

The Institute for Frontier Medical Sciences at Kyoto University said it had cultivated Japan's first embryonic stem (ES) cells that have the potential to grow into nerve and organ tissue. The institute said it hopes to distribute the cells for free to research facilities nationwide by as early as October. Japan has so far had to import human ES cells for research, and the success of the recent experiment is likely to give impetus to Japanese research on regenerative medicine.

+J-PHONE LAUNCHES WORLD'S FIRST MEGAPIXEL PHONE

Japan's J-Phone has announced the launch of the world's first camera phones with resolution of more than a million pixels, outpacing rival NTT DoCoMo and KDDI. J-Phone said it is initially dispatching only 300 units of the megapixel phones, manufactured by Sharp. Currently, 3 out of 10 mobile phones in Japan are camera-equipped.

+DOCOMO TO LAUNCH FUEL-CELL-RUN HANDSETS BY 2005

NTT DoCoMo said it expects to launch a mobile phone powered by a fuel-cell battery for extended hours of use by 2004, a potential boost for its high-speed 3G service. DoCoMo's 3G service, which offers video conferencing and speedy access to the Web, had until recently met a cool reception due mainly to the poor battery life of its handsets.

+DOCOMO MOVES FORWARD WITH 4G TRIAL

NTT DoCoMo has announced a field trial in the center of its research and development for 4G wireless technology. In experiments announced last October, DoCoMo’s 4G system demonstrated maximum bit-rates of 100 Mbps for downlink and 20 Mbps for uplink. The Japanese carrier will examine 4 high-speed transmission technologies in the trials: effective packet transmission; adaptive modulation and channel coding; adaptive retransmission control; and adaptive beam forming based on predicted direction of arrival.