E-commerce -- Japan at the Ready?

E-commerce in Japan is set to take off. But from gerontratic corporations that just don't get the Net to laws against discounting books, any would-be Amazon.co.jp has to jump not a few hurdles before making it to the finish.

The rest of the world began tinkering with the Internet over a decade ago. What began as a Lilliputian whim in America's land of Big Business has rapidly grown into a happy melange of online investing, retailing, and purchasing-everything from multi-language translation software to gift-wrapped melons. Amazon.com was the first e-tailer to catalyze the movement, and more companies pole-vaulted onto the e-commerce bandwagon shortly thereafter, following CEO Jeff Bezos's business model and hoping to get a piece of the action.

In the West these days, the ubiquitous Internet has permeated every scrap of daily life. And according to analysts at GTE, Americans got plugged in tout de suite. In just five years they went online and were ready to shop. In FY1999, e-commerce alone accounted for about 4% of the U.S. GDP, and analysts at Forrester Research project that Web commerce will bolt to $108 billion-or 6% of the total retail market-by 2003.

All tied-up with no place to go
However, Japan-the world's number one technology supplier and most recognized name in computer products-hasn't exactly approached e-commerce possibilities with the same wanderlust as its Western counterparts. Widespread computer use here is only just now emerging from its nascent state, thanks mostly to business luminaries willing to sacrifice traditional business etiquette for new innovations in technology. Yet for e-commerce to reach the same momentum in Japan as in America, a multitude of economic and social barriers must be abrogated . . . and fast. Japanese kids had best start learning how to use computers. Telecommunications companies must increase availability of access points and lower calling rates. And elderly CEOs still harboring antediluvian notions of how to do global business need to give e-commerce a chance. In a nation reluctant to accept quick change, the Internet is unfortunately still tethered to the ground by Japan's small-mindedness towards implementing e-commerce.

E-commerce is good
While e-business has been slow to catch on in Japan, a few cyber pioneers have started businesses online and are succeeding-proving that with the right amount of ingenuity and marketing panache, staking a claim on the Internet frontier can mean making big money in a very short time. One e-business iconoclast who decided to take the plunge, Kiyoshi Nishikawa, recalls getting started. "E-commerce was nonexistent in Japan a few years ago," he reminisces. "I saw great opportunity to jump into this fast-moving field. So I took a risk, quit my job, and started NetAge." Nishikawa used ¥15 million (U.S.$138,880) from his personal savings and money lent by friends to launch NetAge, a company that incubates other e-commerce sites. NetDealers, a NetAge subsidiary that matches car buyers with local dealers, was an overnight success, garnering thousands of requests a month. And after just two months, Softbank Corporation, a $30 billion Internet investment holding company, signed a deal with Nishikawa agreeing to purchase the NetAge site for several hundred million yen.

While cash-crop e-tailing remains uncharted and unfathomable territory for most Japanese business types, those entrepreneurs hoping to enter the Japanese market fare a better chance for survival by using the Net. Startups can, for the first time, compete with established corporate behemoths, and hope to reach the vaunted Japanese consumer directly. In the business-to-business sector, small companies using the Net have grown 46% faster than those who do not, according to the American City Business Journal.

For both small independent firms and large corporations, engaging in e-commerce equals increased efficiency. Sharon Barnett, senior VP at Prestige International, the only Japanese call center company with a global presence and hubs throughout the Asia Pacific, avers that "offering the customer the option [of e-commerce]-whether it be for customer service or technical support-brings certain advantages: convenience, reassurance, and cost efficiency. There's no waiting in a call queue, and you get the ability to communicate day or night, receiving written responses. These are important factors in dealing business-to-business with Japanese firms."

But perhaps the most compelling reason for Japanese businesses to be online is the current absence of trade barriers in cyberspace. According to the U.S.-Japan Joint Statement on E-commerce, "Electronic commerce will be an engine of economic growth in the Twenty-first Century, with the potential to invigorate economies by enhancing productivity, streamlining distribution, and revamping corporate structures. The U.S. and Japan will work toward a global understanding that this duty free environment should remain [as such]." Both governments have agreed to eschew restrictions on e-commerce and are instead encouraging self-regulation. The treaty enforces a laissez-faire approach to electronic transactions, in sales distribution and in management. That's free trade and a bag of chips to boot.

Complete ambivalence
Japanese e-commerce sounds better than a hot bottle of sake on a cold winter night (see sidebar: Rosy predictions for Japan e-commerce)-so why isn't everybody online? In 1998, only 8.3% of the Japanese population was connected. While everyone seems to agree that Japan is the world's number one producer of electronic goods, few people are aware of the complete ambivalence most Japanese consumers and businesses have towards computers. It should come as no surprise that the domestic computer industry accounts for only a sliver of Japan's total GDP and that computer penetration at home and at work is a mere fraction of that in the U.S. Last year, Japanese computer users in the business, government, education, and commercial sectors bought only nine million computers. This is not necessarily indicative of Japan's distaste for technology. Retailers can't keep popular game software like Legacy of Kain and Pokemon on the shelves-Pokemon alone sold millions of copies last year in Japan (and in America). Yet when the majority of Japanese households own game machines and less than 10% of the population own a computer, perhaps an aversion to technology isn't the problem.

So what gives? In this Mecca of hi-tech merriment, you might think that everyone would be online. Yet in Japan, economic and cultural barriers are still too deeply entrenched in society for the Internet to gain widespread acceptance. With hardware costs still high and widespread adherence to centuries-old traditions in the workplace, it's no wonder that only a fraction of Japan is wired and raring to go.

In addition, it's still not profitable for Japanese companies to launch an online site-thanks to exorbitant connection fees. Japan's telecommunications hegemony, Nippon Telegraph and Telephone (NTT), continues to charge for calls based on the minute rather than on a flat-rate system, despite beseeching by local shopkeepers and the U.S. government. An average Internet user can expect to pay an extra ¥4,000 (U.S.$37) per month in local connection fees in addition to regular phone charges. And for those people making a long-distance connection-which includes the 90 million people not living in a major city-rates run around ¥15 (13.8 cents U.S.) per minute. Last spring, Softbank Corporation began pressuring NTT to reduce its high rates, and in July the telephone giant did indeed initiate a flat-rate system for some ISDN users, but that rate will still run around ¥10,000 (U.S.$93) per month, about 466% more than the average monthly American bill.

As if connection rates weren't enough to worry about, consumers also have to deal with high technology fees. By hopping on the subway from Tokyo station over to Akihabara -- Japan's famous "electric town," you could probably score a good deal on a fully loaded notebook for under ¥180,000 (U.S.$1,660). But Akihabara is half a world away for most Japanese, and few discount computer shops exist elsewhere. An average Windows-equipped Pentium laptop can cost ¥270,000 (U.S.$2,500) on the regular retail market, while a Japanese waapuro-on which you can perform word processing functions, make promotional materials, print in color, and play Legend of Kain-costs a mere ¥75,000 (U.S.$690). The average Japanese consumer-who is the average Japanese teacher, salaryman, government employee, and housewife-doesn't want a computer. With high connection rates and pricey computers, what compelling reason outweighs the high cost of buying one?

Info-highway tolls
Hardware and connectivity fees aside, almost all online companies currently charge membership fees-a practice unheard of elsewhere in the world-making online shopping even less appealing. Kinokuniya, Japan's biggest book e-tailer, charges a $20 signup fee before you're allowed to buy. "Retailers in Japan don't offer compelling reasons to switch," Nishikawa scorns. "Membership in online stores must be free. This is definitely hampering e-commerce." Why do Japanese businesses adhere to this system? Barnett speculates that "perhaps [Japanese businesses] are more interested in cost recovery than creating a distribution vehicle." Add membership fees to regularly priced merchandise (nearly all Japanese e-tailers shun discounting so as not to disrupt established relationships with competitors) and you drive that Japanese e-commerce vehicle right into the ground.

If economic conditions alone currently prevent widespread participation in e-commerce, it must be remembered that Japan's doctrinaire culture further obstructs online business transactions. The crux of the problem is Japan's unwillingness to embrace new concepts. Because real change can take years or even decades to take effect, problems like inchoate technology and competition with established companies continue to plague businesses. "The majority of Internet users have never shopped online," explains Nishikawa. "Japanese consumers tend to keep on doing things the accustomed way. The major reason is that Japanese people are hesitant in adopting new ideas."

The gerontocrats
Changing company policies is painful, especially when most Japanese businesses are run by executives who have been climbing established corporate ladders for 40 years or more. One of those executives, Toyota's executive vice president Kosuke Yamamoto, explains that "we think [e-commerce] will come to Japan slowly-not so fast." Newsflash for Toyota Corporation: E-commerce is already here. In fact, it's already there too. And by there, I mean North and South America, Western Europe, and most of Asia. Unfortunately, gerontocratic practices just aren't conducive to cybersuccess; and unless companies are willing to make some efforts and acknowledge that business transacts online too, Japan's rigid system of seniority and following established business practices may mean bad news for the future of e-commerce.

There is also a long-standing practice of deferring to established businesses, rendering competition within the same sector difficult and utilizing the Internet not feasible. This is partially due to the many regulatory barriers that exist. In many cases, it is illegal to undercut prices online. Most American e-commerce sites discount services and products to encourage sales, and most companies can because doing business online in America usually means lower overhead and operating costs. Here, however, for smaller startups hoping to outdo larger established companies, the going looks tough according to Nishikawa. "[Small businesses] must attack traditional retailers, but in a different way. For instance, take the liquor shop. If a new online liquor shop was to emerge, the traditional retailers would definitely protest and try to stop the online activity. And the liquor manufacturers would be very much troubled with how to cope, because they must protect the interests of traditional shops."

Kinotrope Inc.-a successful Web design company and the brainchild of Masahiro Ikuta-uses nontraditional business strategies to attract corporate clients like BMW Japan and Sony Corp. "It takes years for big companies to come up with a business plan and then get enough execs to sign off on it to move ahead," Ikuta says. But with growth figures like the MPT projects, can Japanese businesses afford to wait for five years while American and European companies establish multimillion- dollar e-tail operations online? Barnett thinks not. "Unfortunately, I think many retailers that don't recognize the value of e-commerce will ultimately be forced to drop out."

What the children will inherit
On the consumer side, there are two main obstacles to overcome: removing the computer-as-toy mentality, and dealing with high costs. In the West, people aspire to accomplish everyday tasks on computers: paying electricity bills, researching consumer products, checking stock quotes, trading securities, keeping business records, and the like. In Japan, however, most consumers tend to buy highly graphics-capable computer systems wired for games and anime. "Most businessmen and government workers don't think about using a computer for doing bills or making orders," explains Isami Abe, a junior high school science teacher based in northern Japan. "People around here tend to view computers as game systems. Most places don't have networks established-there's almost no inter-office work done on computers."

This mindset is strongly rooted in the fact that computer education is lacking in Japan. According to a March survey by the MPT, 40% of Japan's teachers are incapable of using a computer, and 75% of public school teachers do not regularly use computers in class, regardless of the in-service training that most educators receive each year. "We have 48 brand-new computers at this school, but of the 42 teachers here, I'm the only one who knows how to use them," explains Abe. "Untrained teachers are afraid of the technology and show little interest, so they never use the [computer] room. Sadly, most of our 600 students will graduate having never learned what computers can really be used for."

National incentives
Most industry watchers say that Japanese e-commerce will explode in the next few years. Unfortunately, 2002 may be too late for Japan's economy to play catch-up with other countries, where cyberbusiness accounts for 15% or more of the total economy. But a few simple adjustments in high-tech pricing strategy and education policy could catalyze a national Internet incentive necessary for Japan's future: A reduction in online pricing would help, and online retailers should drop their existing membership fees.

Financial problems aside, the apathetic Japanese mindset towards e-commerce needs to be considered. It's unlikely that Japanese people will change their entire way of life to foster e-commerce growth, and changing old attitudes isn't Japan's best option. But tweaking the system a bit might allow for change without causing too much mayhem. One way to effectively challenge this system is for the Education Ministry to move ahead with education reforms more expediently-and reforms need to include the teachers as well as the students. If educators themselves lack the skills necessary to teach students about computers, the learning part of computer education might prove a little difficult.

At a forum held in August, the Netday organization, a Japanese volunteer group dedicated to encouraging the infrastructure necessary to get schools online, commented on ways to facilitate computer education. They suggest making the Internet indispensable to all school activities, putting exams, homework, and projects online. Some parents at the meeting also maintained that boards of education should pressure teachers to resign if they resist information-based teaching and learning methods.

Because economic and education reforms won't happen immediately, giving Japanese people a sense of security may help catalyze e-commerce. Sharon Barnett notes one U.S. site that trades steel globally through the Internet, and explains how adherent most Japanese are to established traditions. "This [steel trading] is unfathomable to most Japanese, who consider this type of business the exclusive domain of the big trading companies." It is easy to forget, when conducting e-commerce transactions in English, that the psyche of the user varies from culture to culture. In the case of Japan-a nation where credit cards are still not widely used and nearly every document requires an official red stamp-e-tailers who recognize that consumers here need a sense of security when conducting business online fare a better chance at cybersuccess than those who do not.

No time to lose
It's obvious that not being online in Japan means potentially losing part of the customer base to Western businesses participating in e-commerce. But increased consumer sales by cyberbusinesses could finally help bolster Japan's economy after years of stagnation. Should economic and cultural barriers be removed, Japan's gross domestic product could see a 12% growth rate in the next one to two years after nearly a decade-long economic slump, according to the Electronic Commerce Promotion Council of Japan. More than a million brand-new jobs have been created by the U.S. high-tech industry since 1993, and that sector alone employed four million people last year. With incentives in place, Japan could easily fol- low suit.

What is perhaps not so obvious is the danger of waiting. The Internet changes so quickly that dilly-dallying for even two years could leave Japan so far behind in international trade that a recovery cycle would take years to complete. Foreign companies moving ahead in global free trade could leave Japan scrambling to play catch-up. Most economic forecasters predict that e-commerce in Japan will take hold in the next two to three years and may someday match America's level. It might not be appropriate, therefore, to paint such a melancholy picture of cyberbusiness. But in a global market where trends change daily and thousands of businesses and consumers join the Internet community every hour, the world's second-largest economy can't afford to rely on entrenched traditions and moribund business strategies in hopes that e-commerce will eventually emerge on its own. When Japanese businesses begin to accept Internet technology and consumers agree to wax up their virtual surfboards, e-commerce will explode. "With Japanese e-tailing, there is still some hesitance, no doubt about it," Barnett explains. "But when the Japanese adopt a trend, they adopt it en masse. And e-commerce is definitely the number one trend for the future."

Keep in mind that as a result of the West's affinity for cyberbusiness, e-commerce has already tremendously affected Japan's economy. Whether people embrace it and exploit the Net to their economic advantage, or simply stand by and watch as foreign companies soar to new financial highs online is still an open question. Will Japan make use of e-commerce in time? Nishikawa glances up at his monitor and takes a deep breath. "Our future is up to the will of Internet users in Japan."