ACOM: Finding Growth in Japan

Back to Contents of Issue: January 2002

Shigeyoshi Kinoshita, President of Acom, Japan's second largest consumer finance company, or sarakin, is a believer in the Darwinian theory that evolution does not necessarily favor the strongest, but rather the most adaptable. In addressing the two main investor concerns regarding the industry at present -- market saturation and rising bad debt levels -- as well as in outlining new growth niches, the same theme arises frequently. Restated by Kinoshita in business terms, it reads, "Always know what the client's needs are and try to meet them." Interview by Edward Gordon

by Edward Gordon

Currently, the market is concerned about whether Japan's consumer finance industry has reached saturation and whether rising bad debt levels spell disaster for the industry. How do you view these issues?
People are concerned about the aging population and the declining population of people in their 20s. I believe, however, that the key lies in being proactive and finding new customer niches. Regarding bad debts, of course in the current poor economic environment bad debts will tend to rise. However, I believe that the preventative measures of increasing customer contact and providing customer contact centers should enhance credit evaluation and help keep bad debt levels under control. Also, I believe that focusing all one's attention on merely keeping bad debt levels low may stifle future growth.

Is the competitive environment (e.g. banks, credit cards) likely to impact heavily on the industry?
I don't believe that the banks or credit card firms currently have all the necessary skill sets to be a major threat to us in this industry. I believe that we, a niche industry, have paid more attention to client needs, whereas banks and other lenders are more general credit providers.

ACOM has pursued a policy of diversification more aggressively than most of its peers. While focused on retail finance, it aims to eventually be recognized as the consumer's "Best Life Partner."

ACOM has been an innovator within the industry, being the firm that created automated loan application machines, and also the first Japanese consumer finance specialist to issue an internationally branded credit card. Where will growth come from now in your core lending operations?
In both our core lending operations and new lending ventures, such as Tokyo Mitsubishi Cash One Ltd. and our tie-ups with the regional banks, we are aiming to develop a broad customer base. New customer niches will allow us to sustain growth longer, not only because they offer a new group of customers to target, but also because they allow us to enlarge or add to our image, which in itself will provide new opportunities in the future. However, in order to exploit these new niches, it still comes back to being able to tap into client needs.

Although diversification is supported by a certain reasoning and, as you mentioned by reference to trends in US firms such as Household International, are ACOM's shimpan and credit card businesses planned artificially or natural extensions of existing operations?
Essentially ACOM is a provider of credit to individuals. The form that it takes is less important. However, what is important is to target new niches where we can utilize core competencies -- we don't want to reinvent the wheel. A second important aspect for ACOM is cross-selling -- making sure that one and one adds up to more than two. To that extent, we plan to cross-sell, for example, credit cards through our shimpan network, and develop a servicing business that will allow us to use the expertise we have developed on behalf of other firms.

Can we hope to see home loans or an ACOM Bank one day?
For the moment, ACOM would probably focus on home equity loans and second mortgages if it were to enter the home loan arena, leaving normal home loans to the traditional banking sector. Regarding the possibility of an ACOM bank, in the future I'd like to keep that as an option. The essential ingredient I would like to add is that of greater professionalism in our staff. I would like to create a base of employees that people come to for consulting on their personal financial requirements, and one that can grasp client needs and develop solutions to meet these needs.

Japan's four listed consumer finance majors enjoy ROAs of up to 6.3%. However, it is unlikely that their operating environment can improve any further. Specifically, in June 2000, legislators reduced maximum interest rates to 29.2% (from the previous 40.004%) and will review rates again in June 2003. While it is unlikely that they will be reduced significantly, it is likely that average lending rates will decline. Likewise, given the current "zero interest rate" policy it is unlikely that funding rates will decline further. 

Given higher defaults, the likelihood of higher funding, and lower average lending rates, where does ACOM go from here?
While I tend to agree with that statement to a certain degree, I think that answer is to look for new extensions to current businesses (e.g. TM Cash One) that add new customer channels that leverage existing infrastructure. Also, if we can develop fee businesses, such as our guarantee and servicing business, sufficiently, then we can partially offset the trend towards lower profitability if the operating environment deteriorates. In other words, maximize merits of scale and develop new lines that do not rely on expanding the balance sheet.

Kinoshita graduated from the Keio University's School of Economics in 1973, and spent the first five years of his working life within the Textile Department of one of Japan's trading giants, Marubeni Co., Ltd. Ascending to the leadership of ACOM in 2000, he brings a mixture of experience to this position. 

What strengths to do you bring to ACOM's management?
I wouldn't necessarily call it a strength, but I believe that public perception of me focuses less on me being part of ACOM's founding family and more on me as a businessman. Probably it leads to a more stable and less flamboyant image for the firm as a whole. Given the industry, I'm not displeased with this sort of perception.

What do you stress most to staff and other executives about the management of ACOM?
In that respect, I feel that ACOM is no different from other businesses in that the key factor is attention to client needs. The reason that we have succeeded in developing this niche to a greater extent than, for example, the banks, is that we have provided a level of service whereby clients are happy to borrow from ACOM, despite the fact that rates may be higher than other borrowers. As an example, many customers feel hesitant about using revolving credit with traditional credit cards in Japan (which have actively discouraged a US-style minimum payment system), whereas with ACOM, they are happy to pay back when it suits them.

How do you evaluate your peers?
I have to evaluate management at my major competitors highly, given that they have all created large and profitable enterprises. However, nothing stands still, and management, at ACOM also, will stand or fall on the ability to meet the challenges of a changing environment.
The likelihood of sudden improvement in Japan's economy remains low. Given higher corporate and personal bankruptcies, a lack of fundamental demand, and, for capital-starved banks, the introduction of mark-to-market accounting is likely to dampen potential for growth. In contrast, consumer finance companies carry relatively little baggage from the collapse of Japan's real estate bubble, and indications of interest in further investment from US firms suggest that there may still be growth left.

What sort of earnings growth will ACOM aim for in FY3/03 and beyond?
In the current environment, I feel it would be impractical to ignore the possibility of higher bad debt costs. Further, depending on the competitive environment, we may have to factor on a certain degree of margin pressure. However, I believe that we can deliver loan balance growth of around 8%, and, accordingly, revenue growth of 7-8%. Given that I would like to start lowering average account administration costs, even accounting for slightly higher credit and funding costs, I feel that we should be able to aim for around 7% RP growth. This may not seem as attractive as recent years; however, in these times, I believe it stands up within the domestic financial industry, and also, I feel it is best to look for a sustainable growth pattern.

What is the key word for next year?
Henkaku -- change! While, as the saying goes, the only constant is change, I believe that the current poor economic environment will provide a succession of challenges to all of the firms within Japan's financial system. At the same time, we have entered into a number of new areas and ventures in order to take advantage of the opportunities that arise out of change. Given that none of us operate within a vacuum, this means that a lot of balls are in play at the same time. However, I believe that we will able to cope and grow if we can continue to maintain our focus on giving the customer products that meet their needs.

"Sarakin" means "salaryman kinyu" (or literally finance for employed workers).
"Shimpan" were one branch of installment credit providers, however, the regulatory
framework now makes no distinction, and, essentially they are credit card firms.

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