TT-936 -- Japan Tobacco Goes Further Down the Rabbit Hole, plus, e-biz news from Japan

An Insider's comments on Japan's high tech business world
* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term
technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

General Edition Sunday, Mar 18, 2018, Issue No. 936

- What's New -- Japan Tobacco Goes Further Down the Rabbit Hole
- News -- Abe scandal driving yen value up
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Kyoto's Tenryu-ji, Meguro's cherry blossoms
- News Credits

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+++ WHAT'S NEW

Japan Tobacco - Going Further Down the Rabbit Hole with Russian M&A

Last Friday, Japan Tobacco's (JT) international subsidiary, Japan
Tobacco International (JTI) announced that it would pay about US$1.6bn
to acquire the assets of Donskyo Tabak, a popular discount cigarette
brand in Russia. The acquisition means that JTI will have a 40% market
share (up from the current 33.2%) and remain the No. 1 player in Russia.
The country itself is the third largest smoker market globally, after
China and Indonesia.

Reading this news reminded us of a piece that we wrote back in 2011
(TT-642), about a then-breaking scandal involving JTI's recently merged
Gallaher division, a business it paid about US$15bn for in 2007. The
thrust of the piece was about how JTI had bought in to an operation that
in some parts of its territory resembled a mafia operation, involving
smuggling, bribes, inaction on counterfeiting, computer hacking, and a
number of other offenses.

http://bit.ly/2G49RBP [TT-642 detailing the JTI scandal]

Apart from a mention by Reuters, the scandal never made the news, mostly
because the company itself refused to acknowledge the problems and
instead went to some effort to sue the whistleblowers who surfaced the
scandal. Yes, this was around the same time the infamous Olympus
scandal, and the main elements of the JTI situation appear to be very
similar: foreign whistleblowers, probable management awareness of
illegal activity but failure to do anything about it, and eventual
cover-up and denial.

We're sure that Russia is a great market for JTI. The people there lead
a fairly stressful life, as evidenced by the high levels of alcoholism,
and public interest in health is probably not very high. When all you
can think is how to earn next month's salary to keep your apartment, you
tend not to think too far ahead about how to prevent lung cancer in
30-40 years time. This is fertile ground for frenetic cigarette smoking,
and WHO estimates are that in 2016, 30.5% (36.4 million) of all adults
in Russia used tobacco in some fashion, being 49.8% of adult men and
14.5% of adult women. As with other nations, however, while these
numbers are shocking they are actually decreasing, having come down
about 10% each respectively since 2009.

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-----------------------------------------------------------

[...Article continues]

But that's nothing compared to the massive slide in tobacco users in
Japan, so JT's diversification efforts (not so successful) and
aggressive international M&A (much more successful) are both
understandable and inevitable. Currently the company depends on foreign
income for about 70% of its JPY2.22trn of revenue, and also the bulk of
its JPY394bn of group net profit. Domestically there has been some
respite in the free-fall from e-tobacco, and in fact the company may
have a hit on its hands in the form of the Ploom heated tobacco device.
Sales of the Ploom have already surged from JPY10bn last year to
JPY70bn+ this year.

The problem is that those new international markets having the best
profits are also countries which are the least unsophisticated legally.
This means that with each acquisition, the company has to put up with a
level of ingrained lawlessness that will make it difficult to do
business honestly and ethically. We have already seen this happen with
the Gallaher acquisition - a British company that on the outside (during
Due Diligence, certainly) seemed law-abiding and trustworthy and yet was
(allegedly) deeply involved in international spy-grade intrigues and
dirty dealings.

In fact, as a result of Gallaher's distributor/reseller smuggling
problems in the Middle East, JTI had to become a party to an
anti-smuggling settlement with the EU (reached in 2007) which will cost
it US$400m through to 2022. The litany of charges that the EU took JTI
(and 3 other competitors) to court for included scheming to: smuggle
cigarettes, launder the proceeds of narcotics trafficking, obstruct
government oversight of the tobacco industry, fix prices, bribe foreign
public officials, and conduct illegal trade with terrorist groups and
state sponsors of terrorism!

Yeah, it's hard to imagine a listed Japanese company letting itself be
exposed to this kind of shenanigans, but here we are, and with this
Russian deal JTI appears to be getting ready to go around the block once
more.

Why are we concerned about this deal? Well, JTI made public statements
in 2011 that it felt it had put the Gallaher problems behind it and was
suing some ex-employees for spreading untrue stories about the company.
And yet in more recent media reports, there are continuing allegations
of JTI being too close to some really bad people in Russia. For example,
the largest counterfeiting tobacco company in Europe, Jin Ling of
Russia, apparently operates out of factories that used to belong to JTI
(via the Gallaher acquisition). So JTI doubling down on Russia seems
risky at best to us.

As far as the company's attitude to its own internal problems, suing the
whistleblowers on the Middle East smuggling is hardly enlightened. In
fact, in JTI's case, it was a waste of energy. One of the notable key
employees JTI seemed determined to shut up was Dave Reynolds, who went
on to join the FBI (having already worked for the CIA) and who is now in
a similar risk management job for a medium-sized steel company. Given
his connections and background, and his recent career, we can safely
assume that JTI was unable to pin any of the dirt on him.

http://bit.ly/2G0Oi5r [Internal JTI memo blaming whistleblowers]
http://bit.ly/2IAnck6 [Linked In profile for Dave Reynolds]

Other evidence exists to suggest that JTI's smuggling problems are not
yet behind it. Anti-tobacco campaigner, Luk Joossens, has pointed out
that there is a second part of the EU agreement that serves as a measure
of progress, a formula that calculates tax penalties based on smuggled
cigarettes found at EU borders. Despite the 2007 agreement, seizure
payments by the big four companies (Philip Morris, British American
Tobacco, JTI, and Imperial Tobacco) are still continuing, showing that
the smuggling problem is still very much alive.

Further, although the seizures are down by 75%, Joossens says that the
EU seizure payments under-represent the problem. He says that smuggling
patterns have changed and although seizures are still in the thousands a
year, the size of the individual seizures are getting smaller as
smugglers diversify their channels, and since these numerous smaller
seizures don't meet the reporting threshold, the real numbers are not
being reported properly.

http://bit.ly/2FTF5bT [Luk Joossens 2015 report]

Currently JTI brands are produced in 25 factories and sold in 120
countries. Over the last 10 years it has done more than a dozen
acquisitions that have given the company a major presence in Russia and
Eastern Europe, Africa, and East Asia (except China, which is a closed
market). With so many eggs in difficult international markets, you would
imagine that the Japanese management has significant influence/control
over the foreign operations. However, that doesn't appear to be the
case, and after each acquisition, JTI has followed a hands-off strategy
of leaving the senior foreign management in place.

We predict that this lack of control and accountability is going to be
the point of weakness for JTI, and that in due course having
international managers with different temperaments, business styles, and
value systems will create the conditions for another scandal. Severe
competition from Philip Morris and BAT offers many temptations for
managers in newly acquired firms to take risks so as to meet targets.

With this in mind, it is concerning that JTI's corporate website, under
the section about Risk Management, avoids the liabilities that the
company may be exposing itself to in the course of delegating
management to an external group of executives. We feel this is a big
risk area and needs to be addressed both through closer Headquarters
oversight of the international operations, and also more training about
what is acceptable behavior in this increasingly aggressive market..

In the long run, though, JT has one significant piece of "insurance" -
the Japanese government. The Finance Ministry is JT's largest
shareholder and supports the company in many ways, including
domestically through favorable laws and internationally through
proxy-negotiation in trade and tobacco-control mitigation treaties.
Further, while JT may be pursued in courts around the world (20 notable
lawsuits stated in the Annual Report for FY2016), it is in the end based
in Japan and its existence will depend on Japanese laws (or more
accurately, law makers). Indeed, JTI has intelligently limited its
exposure to the world's most litigious nation, the USA. In other
markets, it is compartmentalized enough that it can decide market by
market whether to fight or flee, something that its biggest competitors
who are based in the USA and the UK don't have the luxury of doing.

...The information janitors/

***------------------------****-------------------------***

----- Snowshoeing in Minakami, Gunma, 11th March 2018 -----

www.JapanTravel.com is organizing a small-group day trip to Gunma
prefecture, where you will traverse the snowy, mountainous region of
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guide who will assist you in navigating the terrain. After that, move on
to the beautiful Takaragawa Onsen for a soak in the hot springs beside
the river, before heading back to Tokyo!

Snow wear and equipment is required for the trip - you can either bring
your own, or rent with JapanTravel.

Shop the experience here: https://goo.gl/6TsThX
-----------------------------------------------------------

+++ NEWS

- 66% of Japanese suspicious of Abe in scandal
- Hokkaido, Kagoshima penalized in tuna catches
- Minpaku opportunity being strangled at birth
- Tokyo/Osaka now only 11th most expensive cities
- Abe scandal driving yen value up

=> 66% of Japanese suspicious of Abe in scandal

A Kyodo News poll done over the weekend has found that 66% of Japanese
believe that PM Abe bears at least some responsibility for a coverup
scandal involving Abe and Finance Ministry favors for a right-wing
crony. Although the scandal has barely been reported by the foreign
press over the last few weeks, things came to a head when it was
revealed by the Asahi newspaper that the Finance Ministry had doctored
documents previously presented in parliament, to remove mention of the
role of PM Abe's wife at the school at the center of the scandal. ***Ed:
Caught red-handed financially supporting a rightwing school, and one
bureaucrat suicide later, Abe is protesting his innocence and will
probably survive to serve out his current term, wounded. However, we
think there is a chance that Finance Minister Aso may be forced to fall
on his sword.** (Source: TT commentary from reuters.com, Mar 18, 2018)

http://reut.rs/2DCXXcW

=> Hokkaido, Kagoshima penalized in tuna catches

Due to a precipitous drop in the supply of Pacific bluefin tuna, 80% of
which is consumed by Japan, the Fisheries Agency is getting tougher with
fishing fleets in regions that seem to be ignoring the current reduced
quotas. Accordingly, the Kagoshima fishing fleet, which exceeded its
catch quota of 112 tons by more than 650 tons, and Hokkaido's fleet
which pulled in 16 tons over its quota, will now be limited to just a
"few tons" in the coming year. The new tuna fishing season starts in
July. ***Ed: Although technically breaching the new catch quotas can
result in fines and even prison time, this weak slap on the wrist for
Kagoshima (in particular) shows that even with possible extinction of
the species through over-fishing, the Japanese authorities still don't
understand how dire the situation is.** (Source: TT commentary from
the-japan-news.com, Mar 18, 2018)

http://bit.ly/2tXPLEB

=> Minpaku being strangled at birth

The decision by local authorities across the nation to effectively choke
off the minpaku (home sharing) movement, by introducing excessive
regulations and requirements of potential renters means that Airbnb and
others are probably in for a rocky time in their major markets (Tokyo,
Kyoto, and elsewhere). The government has said that since local
governments started accepting applications from residents last Thursday,
there have been just 8 registrations from home sharers. Given that
Airbnb has about 40,000 rooms on its database, this isn't a great start.
The new Minpaku law will go into effect on June 15th, so there is still
plenty of time for renters to register, but rules such as limiting room
rentals to the dead of winter (a Kyoto urban area requirement), just
Fridays and the weekends (Shinjuku ward), or getting permission from
every neighbor within 10m of the house being rented (Shibuya ward),
means that grumpy neighbors and paranoid city offices have an
unprecedented level of control over how someone uses their property.
***Ed: This really is a pathetic situation, and one that the Prime
Minister's office originally said it would prevent from happening. But
now that the PM himself is embroiled in a damaging scandal, it's
unlikely that the Minpaku revolution will see much help from that
quarter.** (Source: TT commentary from asia.nikkei.com, Mar 16, 2018)

http://s.nikkei.com/2DD9Mjm

=> Tokyo/Osaka now only 11th most expensive cities

We keep telling intending overseas travelers that Japan is a lot cheaper
than they think it is, and this has just been reconfirmed by the
Economist magazine's Worldwide Cost of Living Survey, just published.
The survey has found that Singapore is the world?s most expensive city
for the fifth year in a row, then Paris, Zurich, Hong Kong, Oslo, Seoul,
Geneva, Copenhagen, Tel Aviv, Sydney, and at the tail end, Tokyo and
Osaka tied at 11th place. The survey compares the prices of 160 goods
and services in 133 cities around the world. ***Ed: As the next article
shows, however, the Yen may not stay cheap for long...** (Source: TT
commentary from www.japantimes.co.jp, Mar 16, 2016)

http://bit.ly/2IBB11G

=> Abe scandal driving yen value up

The damaging political scandal engulfing PM Abe is causing international
investors to bet that he will be sufficiently weakened in the aftermath
that Abenomics may become a casualty. If so, this will be just one more
factor influencing the re-appreciation of the yen. Other factors include
the improving performance of the corporate sector, particularly
international firms, and the winding down of quantitative easing
measures by the Bank Of Japan (BOJ). Apparently the bank's monthly bond
purchases has fallen from an original level of about JPY80trn a month to
now around JPY54trn - the lowest level of bond purchases since July
2013. ***Ed: Watch the stock market to see what investors really think.
Generally speaking, a fall in stocks means investors expect a rise in
the Yen.** (Source: TT commentary from bloomberg.com, Mar 12, 2018)

https://bloom.bg/2IzzJUO

NOTE: Broken links
Some online news sources remove their articles after just a few days of
posting them, thus breaking our links -- we apologize for the inconvenience.

***------------------------****-------------------------***

---------- Bilingual vet clinic opens in Azabu ------------

PetLife Veterinary Clinic is opening its doors in central Tokyo from
March, providing bilingual (Japanese/English) services for both the
domestic and international communities. The clinic provides experienced
veterinarians with many years of experience serving families and their
pets using the latest technology. They have a compassionate and welcome
approach and aim to nurture close bonds within the local community.

The official opening is March 6. Pet owners are welcome to come visit
and check out the new center.

1F. Daiichi Bldg., 2-3-5 Higashi Azabu, Minato-ku, Tokyo 106-0044.
TEL:03-6807-4058 Website: http://petlife.co.jp/en/
-----------------------------------------------------------

+++ UPCOMING EVENTS

*** No events this week.

***------------------------****-------------------------***

+++ CORRECTIONS/FEEDBACK

*** No corrections this week.

***------------------------****-------------------------***

+++ TRAVEL DESTINATIONS PICKS

=> Kyoto Tenryu-ji Temple in Spring
Delicate and graceful weeping cherry trees

The weeping cherry trees of Tenryu-ji Temple are delicate and graceful.
Thousands of strings of rose-colored gems hang down in contrast with the
blue sky. When the gentle breeze sways the flowers tenderly, down comes
a drizzle of falling cherry blossoms. Just stunning! Autumn in Tenryu-ji
Temple is also nice and powerful. I took some photos from the same angle
both in spring and autumn. So, please enjoy these photos from these two
fantastic seasons in Kyoto.

http://bit.ly/2DFRXAs

=> Cherry Blossoms along Meguro River
The simple beauty of scattered petals

The more than 800 cherry trees along the Meguro River will shortly be at
their best. The tree-lined avenue runs for about 4km between JR Meguro
Station and the Toyoko Line's Nakameguro Station. I enjoyed a 30-minute
walk under these cherry blossoms in full bloom. The day was windy, and
so the soft pink petals were scattered with each breeze and fluttered
down into the river to form a beautiful pink blanket. The combination of
pretty pink floral patterns and light reflecting off the river was an
amazing sight to see.

http://bit.ly/2pkVdMk

***------------------------****-------------------------***

***********************************************************
END

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+++ ABOUT US

STAFF
Written by: Terrie Lloyd (terrie.lloyd@japaninc.com)

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