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Japan Internet Report No. 44 - December 1999

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In this month's issue:

- The Internet and personal responsibility in Japan
- Japan's culture of "excessive dependence"
- Interview with Mike Allen of ING Barings
- Rest and relaxation for the holidays

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The Internet and personal responsibility in Japan

I'm not sure I agree entirely with the now-hackneyed expression that "the Internet changes everything." But I do see Internet usage as one catalyst for what is popularly being called the "shift to personal responsibility" in Japan.

This "shift to personal responsibility" is being brought about by economic necessity. Today Japan is a "membership society," whereby citizens pay heavy dues in return for certain benefits of membership. These benefits include government-subsidized health care and pension plans, and unemployment "insurance" in the form of guaranteed-for-life jobs for government employees and boondoggle projects for workers in other sectors. The "dues" include excessive regulation that keeps domestic prices high, and exorbitant inheritance taxes that ensure that ownership of much real estate reverts to the government. In this sense Japan is very much like the entitlement societies of Europe. 

But this model is breaking down. Government and corporate pension plans are underfunded, and even local governments are running out of money. As a result, people are realizing that they may not be able to depend on their companies or the government to provide for them after retirement. Rather, they need to make their own savings and investment decisions. Many will choose the Internet as a tool for research and trading. And next year the government plans to authorize domestic versions of 401K plans - bringing on a shift from defined benefits (corporate/government responsibility) to defined contributions (individual responsibility).

This trend toward greater individual choice and responsibility is evident in other sectors, too. For example, the process of recruiting new university graduates in Japan has been largely transformed. Students can now freely contact companies of interest - and even "talk" with employees of those companies directly via e-mail - instead of being subject to interview schedules controlled by agreements between universities and corporations. Meanwhile, start-ups such as Dai-job.com are using the Internet to cater to an increasingly mobile mid-career labor force.

In the travel sector, for years agents have been coping with the growth of free independent travelers (FIT) and the decline of more profitable group tours. Now discounted tickets are widely available online, and consumers can research destinations on their own without help from travel agents.

In telecommunications, NTT was quick to issue disclaimers that, unlike the circuit-switched model, it couldn't guarantee quality under packet-switching, and that users would have to accept "greater responsibility" in exchange for lower costs.

That this "shift to personal responsibility" is considered such a dramatic change in Japanese society underscores the extent to which individuals tend to depend on groups (government, corporations, organizations, families) rather than themselves for the quality of their experiences. Now the Internet is starting to provide Japanese consumers with an object lesson in personal choice - and personal responsibility.

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Japan's culture of "excessive dependence"

In a recent book, journalist Nobuhiko Ochiai makes some intriguing points about personal responsibility. 

He says that Japan suffers from a culture of "excessive dependence." Wives depend on husbands, husbands depend on their companies, companies depend on their banks, and banks depend on government bureaucrats. The problem, says Ochiai, is that those being depended upon are not truly the most dependable partners.

One symptom of this excessive dependence is the term "salaryman" (a foreign loan word in Japan that means "white collar worker"). He notes that in Japan, "I'm a salaryman at XX Corporation" is considered an acceptable and complete description of one's occupation. It is rare to hear someone say "I'm a marketing specialist" or "I'm an engineer." 

Where else in the world, asks Ochiai, would "white collar worker" be a completely adequate description of one's job function? Ochiai's point is that people in Japan depend on the organization to define not only their occupations, but their careers. Instead, he says, they should start defining their careers in terms of skills and capabilities, rather than the organizations to which they belong. 

The Internet may not be directly responsible for the shift to personal responsibility in Japan, or for reducing the "excessive dependence" Ochiai talks about. Concomitance doesn't equal causality. But it's fascinating to see growth in Internet usage paralleling these trends... 

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Interview with Mike Allen of ING Barings

Over the last two months we enjoyed in-person and e-mail chats with Mike Allen, senior analyst at ING Barings specializing in retail. Here are some highlights:

- You take a refreshingly different view of the synergy between convenience stores and e-commerce. Where is this development heading and why?

Convenience stores have an obvious role to play in breaking down some of the bottlenecks that currently exist in Japanese cyberspace. Nonetheless, I think markets have been very unrealistic in assessing the potential profit that convenience stores might derive from playing this role, and have also failed to consider whether or not these bottlenecks might eventually be solved in other ways, and that some of these other solutions might actually do more harm than good for the convenience store industry in the long-run. 

There are two ways that convenience stores are going to facilitate e-commerce. The first is by accepting payments on behalf of e-retailers from customers who can't or don't want to use credit cards. The second is to take deliveries of goods for pickup by customers. Both of these solutions are pretty unique to the Japanese retail environment, and have a lot of observers getting excited about yet another new business model made possible by the internet.

The fact is that there is nothing new about either of these ideas. Convenience stores already accept payments for hundreds of catalogue retailers and service providers. Most catalogue retailers tell us that about 35% of their bills are paid through convenience stores. 

It's a complete myth, however, that Japanese consumers prefer to pay this way. Consumer surveys suggest that, in fact, it is the manufacturers who prefer to be paid this way because the commission charged by the convenience stores is lower than that charged by the credit card companies. Let's get real, here. Experienced e-shoppers are going to want to use a credit card or a debit card, and I think that's the way nearly all e-commerce in Japan will be paid for in the future.


- What's going to happen in the meantime?

In the meantime, convenience stores will take a 50 yen commission for each transaction that they facilitate. Of course, nobody has any idea how large the e-commerce market is going to be, but if I had to take a stab at it, I'd guess it would grow to about 2% of consumer spending within the next three or four years. This would give us a market of roughly 6 trillion yen. Most estimates I've seen are a lot lower than this, but I believe Japan has an ability to catch up to the rest of the world very quickly. 

If e-commerce payments follow the pattern of catalogue shopping payments, and there is no reason to believe otherwise, then about 2.1 trillion yen in payments could be made through convenience stores. But for convenience stores, it doesn't matter whether you're buying a book or a yacht, the retailer is only going to make 50 yen per transaction. That 2.1 trillion yen is only going to amount to 60 million transactions, which will translate into 3 billion yen in commissions. Total sales in the convenience industry were just under 8 trillion yen last year. That's a potential contribution of less than four-hundredths of one percent. To add insult to injury, convenience stores are franchise operations, which means that only about a third of that 3 billion yen is going to find its way to the head offices in the form of royalties paid out by the franchisees. 


- What about accepting deliveries?

This isn't new either. The parcel service companies also tell us about two-thirds of their current deliveries of small parcels are made through convenience and other small retail outlets. The problem is the incredible amount of congestion on Japanese roads, which makes it impossible for parcel delivery companies to have much of an idea what time they are going to be able to deliver anything. If one of the reasons you order goods on the Internet is to reduce the time you spend shopping, then there isn't much point in ordering anything on the Internet if you have to spend a whole day waiting at home for the delivery.

Most convenience stores have about ten square metres of storage space that has been rendered obsolete by very advanced on-time delivery systems. That puts about 300-400 thousand square-metres of storage space distributed fairly evenly throughout the country. But let's be realistic. One of the things that is going to drive growth in electronic commerce is the diversification of available merchandise and services. Almost half of e-commerce is probably going to eventually involve financial and travel services that won't require any pick-up at all. Another very big part of e-commerce is going to involve some rather large items, like automobiles, for example, that you can't fit inside a convenience store. I think the market for convenience store deliveries is only going to be about 20% of the e-commerce market. I'd guess they are going to be taking in about 700 million yen in commissions on 14 million deliveries. With commissions from deliveries and payments combined, we are still talking about less than five hundredths of a percent of convenience store industry revenues.


- So the recent runup in 7-Eleven Japan stock is basically silly?

I suspect it may get even sillier, first, but eventually, this will end in tears. 


- Maybe the market is considering 7-Eleven Japan an Internet "tracking stock" of sorts, thanks to its investments in CarPoint Japan, e-Shopping! Books, and presumably more to come?

You could also buy a Volkswagen and pretend it's a Porsche. In fact, a lot of the components in a Porsche are the same as those in a Volkswagen, so you might be able to persuade someone else that your car is a Porsche, and sell it at ten times the price you paid for it. Someday, though, someone is going to wake up and realize they paid for a Porsche and all they have is a Volkswagen to show for it. 


- How did you come to be a security analyst? What was your background in Japan and in the Japanese language?

I studied Japanese at the University of the Pacific in Northern California. Part of this program involved a semester at the Kansai University of Foreign languages, just north of Osaka, and an internship, which I chose to complete in a magazine publishing outfit run by Matsushita Electric. I went to work for this company as soon as I graduated, and later moved into a consulting firm that helped Japanese companies communicate with their foreign investors. Then the Japanese equity bubble happened and I got sucked in. The fact that I could speak and read Japanese, write fairly coherently in English, and even comprehend a few basic things about company finances made me fairly unique back then. Today, that much is taken for granted. 

- Where should we all invest our money in the Japanese Internet space?

My expertise is in retailing, so all I can suggest is that retailing is probably one of the industries that will change the least. I just read somewhere that more than half of U.S. households are now online, and yet, less than 1% of consumer spending is conducted on-line. I don't think shopping is ever going to be the main objective for going online. I would stick to the same sort of themes that have proven successful elsewhere. Namely, those who facilitate internet traffic, such as the telecom equipment makers and the technology consultants. Business-to-business commerce and financial services will also probably be a lot bigger and more profitable than e-retailing. 

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Mike Allen
Senior Analyst
Retail Stores
ING Barings Securities (Japan) Limited
michael.allen@ing-barings.com
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Rest and relaxation for the holidays

Here's hoping you can take time off for rest and relaxation during the upcoming holiday season. All of us at TKAI wish you the greatest happiness and success in 2000!