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Wave of ChangeBy Colin Donald. Autumn 2020
Traditions die hard in Japan, but a crisis often sparks accelerated change and innovation. Praveen Kumar, manager of Baillie Gifford Shin Nippon and deputy manager of the Baillie Gifford Japan Trust, talks to Colin Donald about the upstarts making inroads
Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested.
This article originally featured in Baillie Gifford’s Autumn 2020 issue of Trust magazine.
Revolution has come to Japan. The hanko name-stamp, used for centuries to sign and certify even routine personal and business documents, is finally on the way out. This is great news for CloudSign, the digital certification service launched by online legal portal Bengo4.com, a Baillie Gifford Shin Nippon holding.
A pocket-sized cylinder carved with personalised name characters, the hanko is as indispensable in Japan as your keys, handbag or wallet. Even before the coronavirus, it was seen as a pre-digital anachronism, but the pandemic made it a public health nuisance. The need for real red ink to formalise transactions made remote working difficult. Trains were packed with anxious employees, compelled to turn up at the office.
Then in April the chairman of the Japan Business Federation publicly advocated retiring the hanko, and Prime Minister Abe ordered a review of the laws requiring its use.
“The possibility of the hanko not being around in 12 months’ time has given a further boost to CloudSign, a market leader in certification,” explains Kumar. CloudSign managed to treble revenues in April compared to the previous year.
Kumar sees the “shock” of coronavirus accelerating the “shedding of traditional paper-based business practices”. But the demise of the hanko symbolises something deeper: greater readiness by companies and consumers to embrace the new.
“Kitanotatsujin’s market testing-based approach to product development… emphasise its natural ingredients from its native Hokkaido”
A tech pioneer since the 1960s, Japan has been slower than other economic powerhouses in capitalising on cheap computing power, cloud infrastructure and advanced software technologies. Kumar sees the changes now underway as a “third revolution”, following those of industrialisation in the late 19th century and the consumer goods boom that turned Sony, Mitsubishi and Toyota into global brands.
“Japanese companies have tended to see IT as a cost of doing business rather than a source of competitive advantage,” Kumar says. “They’re geared towards trying to survive and retain employees rather than to grow. There’s a ‘why fix it if it ain’t broke?’ attitude that has kept working practices stuck in the past.”
He recounts a chat with the chief executive of a large Japanese staffing company about coping with lockdown. “He was embarrassed to admit they didn’t even have laptops or iPads that would allow remote working. And they’re IT recruitment specialists!”
Craftsman carves a hanko name-stamp.
Shin Nippon is focused on a new wave of aggressive, nimble and flexible Japanese companies “nipping at the heels of the big behemoths. Whole traditional sectors are being disrupted by ecommerce and mobile payments apps,” he adds.
Coronavirus, Kumar says, has given these younger, more cosmopolitan businesses “an opportunity to get stuck in and accelerate the pace of disruption. They are not afraid of investing aggressively to exploit new opportunities.”
Kumar sees big openings for small companies with “lean structures and a sophisticated understanding of artificial intelligence (AI)”, liberated from hanko-stamping decisions at every rung of the hierarchy.
On the consumer side, one beneficiary of lockdown is Demae-Can, the country’s top online food delivery service. The market is still “very immature”, Kumar says, largely owing to the ubiquity of delicious affordable restaurant food.
“Demae-Can was already in a strong position. Line, the country’s most popular mobile messaging app, recently increased its stake in Demae-Can from 20 per cent to 60 per cent, injecting a significant sum for growth investment. If Line’s 83m monthly active users in Japan want to order food they are channelled through Demae-Can. Growth in orders has accelerated during the crisis and, as a SoftBank subsidiary, Line has got the firepower to invest aggressively.”
Shoppers steering clear of Japan’s pristine malls and department stores also help Kumar’s final example of a thriving upstart, the subscription-only cosmetics retailer Kitanotatsujin. This innovative company provides high-grade beauty and wellbeing products and relies on an AI-assisted understanding of its customer base to refine its in-house advertising and marketing activities. Profits increased 84 per cent year-on-year in the first quarter of 2020.
Now Kitanotatsujin’s biggest challenge is meeting demand for star products such as the Hyalo Deep Patch, which targets eye bags and laughter lines. There’s a lengthening waiting list of 13,000 would-be recipients of its monthly product packages, tailored to the skin types and specific needs of its super-fastidious consumers.
“Kitanotatsujin’s market testing-based approach to product development and its online-only marketing emphasise its natural ingredients from its native Hokkaido. It uses algorithms that can anonymise data and process customer feedback from Japan’s numerous make-up discussion forums. Unlike traditional cosmetic firms, it spends very little on billboard and TV advertising. Its sophisticated AI can monitor responses to its digital ads, allowing it to fine tune the messages that achieve the highest sales for every yen spent on marketing,” Kumar says.
As well as the use of a high-margin subscription model, Kitanotatsujin is proving that targeted trials beat the traditional approach of “throwing billions at developing lots of new products and seeing what sticks”. Kumar sees using AI to breed a stable of best-selling star products as a challenge to the giant brands.
“We have reached a stage where traditional corporate Japan has no other options and no excuses. If they don’t embrace these kinds of new technologies and practices, it’s just going to get tougher for them.”
Coming back to CloudSign, Kumar says it’s “growing like an absolute weed” by short-circuiting old Japanese ways. As well as its usefulness as a hanko alternative, he commends it for “taking a short-term hit on profits to invest heavily in growing scale”, a feature common to the entrepreneurial small businesses that Shin Nippon likes. To him, the exciting companies are those readying themselves to compete in the Japan of the future, leaving tradition behind.
If you’d like to hear more about Kitanotatsujin and the allure of the Japanese make-up market, listen to The Beauty of Japanese Cosmetics in our podcast series Short Briefings on Long Term Thinking. You can find the podcast at www.bailliegifford.com/podcasts and subscribe on Apple Podcasts, Spotify and TuneIn.
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The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.
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Colin Donald is deputy editor of Trust, having joined Baillie Gifford in 2018. He is a former business editor of the Sunday Herald and has worked as a lecturer and journalist in Japan.
Illustration by darlingforsyth.
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