The Pulse

Back to Contents of Issue: May 2003

The word on the street from the heart of Tokyo

Nobody's Fools? -- Leo Lewis

"A CIGARETTE," THE OLD saying goes, "is a pinch of baccy wrapped in paper with a fire at one end and a fool at the other."

For nearly a century, the world has kindly provided a constantly swelling number of fools, and a handful of companies have grown fantastically wealthy just by putting that demographic at the center of their business plan. Philip Morris, Japan Tobacco (JT) and British American Tobacco (BAT) may worry about the odd lawsuit, but their profits have always looked solid as a rock and particularly so in Japan.

But all that could be changing. In February, JT said that the 60 billion cigarettes it sold in the home market during 2002 was 5 percent down from the previous year. While the drop doesn't exactly put JT in the poor-house, it's certainly got the suits at head office reaching nervously for their Mild Sevens.

In explaining the sales slide, JT pointed to the grim economic climate and the double tax hike that forced retail prices to rise by about JPY10 per pack. Analysts scoffed at this claim, pointing out that relative to other G7 nations, at JPY260 a pack Japanese smokers pay exceptionally little to stoke their habit. British smokers, by comparison, merrily puff away despite paying the equivalent of JPY850.

Nor can the drop be readily explained by any serious intervention on the part of the Japanese government -- recently slammed by the World Health Organization as a "dinosaur." Until recently, the health warning along the side of your Caster Milds read: "Since smoking may be harmful, let's not smoke too much."

The clue to all this lies in a closer look at those JT figures. The domestic market may be suffering, but the group's international business is humming away. In the same period that Japanese sales dropped 5 percent, international sales soared by more than 17 percent. JT, like its big sector rivals, has realized the rich potential of markets like China and Indonesia, and has been busily weaning those countries off their domestic brands and onto Camels and Salems.

The most significant conclusion being drawn from this is not that China and the rest of East Asia are good opportunities, but that Japan is now a mature market. And like all mature markets, there is only one direction that sales can go.

Earlier this year, Tokyo's Chiyoda Ward imposed a ban on smoking in the streets. While still nowhere near as fierce as the sort of bans in place in California, the move reveals a new boldness on the part of the anti-smoking lobby. Other Tokyo wards and cities across Japan are fully expected to follow suit. It is precisely that sort of confidence that is giving JT its current headache. It is a short step from smoking bans to European-style bans on tobacco advertising. JT et al have seen the writing on the wall -- or more precisely, the future lack of it.

The most recent marketing measures by the cigarette companies smack of rising desperation. In Chiyoda Ward, JT has taken to placing "smoking wagons" at strategic points outside offices to beat the ban and draw smokers into a heavily branded alcove. Philip Morris has, since 1995, run its "Smoking Manners" campaign in a thinly-veiled ruse to put its brands on ashtrays everywhere. Its TV adverts, involving promises of a desert island paradise, have grown more and more oblique as the group tests out the "alternative" marketing schemes it knows it will one day be forced to adopt anyway.

But the efforts may all be in vain. Japanese smokers are gradually showing that they are nobody's fools, and the cigarette companies face a very rude awakening.

Smartcards to Play New Roles for JR East, ANA -- Bruce Rutledge

TOKYO IS QUICKLY BECOMING the world's smartcard laboratory. About 5.7 million cards with integrated circuits (ICs) have been sold to commuters to use on JR East trains -- the noncontact cards don't even have to be taken out of commuters' wallets or bags as they pass through the wickets. But that's old news to Tokyoites. What's new are plans by JR East and All Nippon Airways (ANA) to extend the use of smartcards.

First, JR East announced in March that by next spring, its Suica smartcards will be used for shopping at about 500 stores in its station complexes. This is the second step in making Suica an industry, and possibly a national, standard for electronic money. JR East says convenience stores and restaurants in the stations will accept the Suica cards for payment, but kiosks will still only accept cash. "If e-money cards aren't used by a lot of people, the system won't spread," the company says. "We are targeting sales of 2 million (new) cards."

ANA, Japan's second biggest airline, is planning to use a different smartcard system, Edy from Bit Wallet, in its campaign to let fliers turn ANA mileage into e-money. For JPY500, any of ANA's 9 million frequent fliers will be able to buy an IC card and convert every 10,000 miles traveled into JPY10,000 in e-money. ANA says the e-money could be used for purchases in 23,000 stores nationwide sometime in fiscal 2003, which begins April 1. The airline calls this program a world's first for e-money, and the media has reported that ANA executives expect 1 million members to buy the IC cards when the program officially kicks off on June 1.

Nowhere in the world is e-money being put to the test on this scale. Edy and Suica are duking it out to emerge as e-money standards, and their test markets are starting out in the millions. Japan has the right mix of population density and technological savvy to make this heavyweight battle get very interesting very fast.

NTT Units to Regroup to Kill Off Broadband Competitors -- Bruce Rutledge

NIPPON TELEGRAPH AND TELEPHONE is reportedly planning to join together units of its empire to form a more cohesive broadband operation. If the report is true, NTT could quickly have competitors in a stranglehold. Meanwhile, Softbank is scrambling for cash in an attempt to be ready for the next phase of Japan's broadband battle.

The Nihon Keizai Shimbun newspaper in March said four NTT group firms -- the holding company, NTT Communications, and NTT East and West -- would form a joint venture as early as this year to compete in the broadband market. The plan is to be included in the parent company's medium-term business plan to be released in April.

With Japan establishing itself as one of the cheapest markets in the world for broadband services, NTT has decided to try to strong-arm its competitors. The joint venture would offer everything from Internet access to ADSL connections to Internet protocol (IP) telephone services, and the NTT infrastructure would make it very hard for competitors like Softbank to compete. The only competitors large enough to fight toe-to-toe with a reunited NTT would be Tepco and the other electric utilities, which are wading into IP phone and fiber-to-the-home services.

But Softbank is the main reason Japan has cheap ADSL connections. It started the price war in 2001 and hasn't let up since. Most recently it has sold shares of some of its US holdings, including Yahoo, to raise money for the next phase of the battle and to pay down debt. The Associated Press reported in March that the company plans to raise an additional $77 million by selling 8 million shares in UTStarcom, a US broadband equipment maker, some time in April.

But how long can Softbank CEO Masayoshi Son fight against the deep pockets of an NTT banded together with the sole purpose of eliminating pesky price-cutters like Softbank? Even Son would have a hard time fighting a unified NTT. Isn't that why the empire was broken up four years ago? NTT is bound to argue that it doesn't dominate broadband like it dominated conventional phone services before its 1999 breakup. But the "chaos" of the current broadband market in Japan has irked NTT for some time. It doesn't like what it can't control. And this latest plan is all about controlling the broadband market like it controls the regional phone market. That would mean the slow death of competition, quiet price hikes and an end to all the "chaos" that makes Japan's broadband market one of the few dynamic markets in a lackluster economy.

Toshiba Creates Fuel Cell for Laptops

IN BRIEF: Toshiba announced in March that it has developed a fuel cell that will power laptop computers in the same way that larger fuel cells power cars. The company is hoping to work out the remaining kinks and have the fuel cell for sale by sometime next fiscal year.

The small fuel cell creates electricity by reacting with oxygen in the air and methanol, which contains hydrogen. The biggest remaining obstacle to the fuel cell's success is the methanol, which is registered as a harmful substance in Japan, according to Japanese media reports. Methanol also can't be taken on planes. But the Toshiba fuel cell uses very little methanol, according to reports, which may allow it to squeeze in under industry safety guidelines.

COMMENTARY: NEC, Hitachi and others are also devoting a lot of time and resources to developing smaller fuel cells to power a range of products. Japan controls 70 percent of the world market for lithium-ion batteries, according to the Nikkei, and as this market makes its transition to next-generation technologies like fuel cells, about JPY300 billion in annual sales will be up for grabs.

Toppan Forms Cellphone Content Alliance With Handango

IN BRIEF: Toppan Printing is officially getting into the cellphone content business by acquiring the Japan sales rights of US content provider Handango. The US company owns about 20,000 types of software, according to press reports, and 400 of those are in Japanese. Toppan will begin distribution in Japan this summer; it already distributes content for PDAs.

COMMENTARY: Toppan, one of Japan's leading printers, is also the world's leading manufacturer of color filter arrays. It has an intense interest in electronic printing technology and is trying to position itself in all media, now including the keitai. Toppan has also invested in E Ink of Massachusetts to create color displays for PDAs, cellphones and car navigation systems. The printer has been focusing on what it calls the "three Es": electronics, e-business and ecology. We know it is taking at least the first two very seriously.

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