TT-459 -- Whatever Became of Hikari Tsushin? Ebiz news from Japan

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General Edition Sunday, March 2, 2008 Issue No. 459


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Bet on the jockey, not the horse... That is a wise piece of
advice we received years ago from a highly experienced
investor whose returns were consistently modest but
consistently profitable. The only trouble is that in many
Japanese companies today, with second and third generation
management running the business, sometimes it can be quite
a challenge to figure out just who the jockey is. Instead,
if you look hard, you'll see a group of old codgers
sitting in the viewing stands yelling out instructions to
a very confused horse.

But thanks to the rise of deregulation and foreign
investment, some jockeys have appeared on the scene in the
last 10 years who are purposeful and single-minded enough
to win. The problem is that some of them forget just whose
horse it is. With his resurfacing in the Appeals Court last
week, Takafumi Horie would qualify for this class of
business leader.

While Horie came unseated on the back furlong, there are
many other just as aggressive and/or single-minded CEO's
out there who are still in the race. HIS' Hideo Sawada
almost came off over his Skymark Airlines debacle, but
wisely pulled his head in and has gone back to making
money in the travel bookings business. Another would be
Masayoshi Son, who almost came unstuck with his broadband
efforts, but who after taking the biggest gamble of all
has been able to go on and do the largest technology M&A
deal that Japan has ever seen. He is firmly back in the

Today we found ourselves wondering about another famous
jockey from the dotcom boom, but whom you hear very little
of these days -- Hikari Tsushin's Yasumitsu Shigeta.
Hikari Tsushin being Japan's first and largest reseller of
mobile phones.

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[...Article continues]

Shigeta founded Hikari Tsushin in 1988 at the tender age of
21. He started the company with just JPY1m (US$9,700) and
three employees, and thanks to being in the right place at
the right time as the mobile telephone sector was
deregulated, he quickly grew the to become one of the
largest cell phone distributors in Japan. When Hikari
Tsushin listed on the JASDAQ, he also became the youngest
CEO of a public company.

On a roll by the mid-1990's, and long before anyone else
realized that there was a dotcom boom coming, Shigeta
decided to set up an investment fund and was pouring the
profits of the mobile sales business into hundreds of local
and foreign start-up companies. For a while, Hikari Tsushin
was known as the "go-to" company for any aspiring
entrepreneur, a position that more recently has been taken
over by Softbank Investment and Yoshitaka Kitao. Indeed,
Shigeta was on the board of Softbank until Kitao kicked him
out back in 2000.

2000 was indeed an annus horribilus for Shigeta and his
company. Readers who were following Internet bubble stocks
back then will recall that as the NASDAQ dotcom crash
started gathering momentum in April of 2000, the echoes
were very much felt here and Hikari Tsushin itself suffered
a spectacular stock crash. In a period of just 6 weeks,
JASDAQ listing number 9435 lost 93% of its value.

In a way, what happened to Hikari Tsushin was a microcosm
of the entire industry. Investors panicked after a shock
announcement that the company would make huge losses over
the bankruptcy of a related reseller. This would normally
set a company's stock back one or two quarters, but
unfortunately for Shigeta, rumors were also flying around
the market about whether he as CEO would be investigated
for Window Dressing (the same offense Horie is alleged to
have committed), and of course there was the carnage going
on over in dotcom stocks in general globally.

As a result, by late April, journalists and analysts alike
were predicting the demise of the once high flying company
and its CEO.

However, what the journalists failed to understand was just
what kind of person Shigeta is. We have always thought that
there are two fairly distinct new-generation Founder/CEO
personality types in the Japan market. There are the
so-called "Consultant" types, such as Hiroshi Mikitani the
CEO of highly successful but sometimes shaky Rakuten
Ichiba, the massive online shopping mall. He is
well-educated and a well-connected thinker of the market.
He usually seems to understand where the market is going.
Then there are the "Street Fighter" types (our term), such
as Masahiro Origuchi of Goodwill, and of course Shigeta.

Street Fighters may have excellent insight, but their
business model is less strategic and more operational. They
set their sights on a market they want to dominate, then
they go all out to become the Number One player. The way
they do this is by running their businesses like mini
armies. They typically amass thousands of young high school
graduates without much in the way of career prospects, and
who are attracted to working for a populist leader. They
become willing but dispensible foot soldiers to go directly
out to the community to sell the vision.

The troops are typically not treated very well and
turn-over is high. But those who through sheer Darwinian
instinct become successful, the organization is structured
to recognize and promote them, and they become commanders
of their own teams and divisions. The structure of these
types of companies is very autocratic, and everyone is
expected to take and execute orders from above without
comment, and to demonstrate absolute loyalty to the
company. Reminds you of a street gang, doesn't it?

But obviously a largely law-abiding one...

One could say that this type of atmosphere is highly
representative of the old Japanese way of building a
business -- and you can still see the autocratic "Bushi-do"
way very much in action at any Japanese automobile
factory. The problem is that while it makes a huge
workforce available to execute the vision of one person,
it is a slow ship to turn and there is very little
proactive thinking going on, so the business has to be
simple and obvious.

Secondly, different from an auto factory, the Darwinian
aspect of these venture firms also introduces an element
of scheming as people try to compete to survive. They
start to develop a habit of taking short cuts to meet
expectations or get ahead, and that attitude can quickly
get replicated across the business. We've seen this over
and over with fast-rising Japanese venture companies, and
most notably with companies like Hikari Tsushin back in
the late 1990's, and more recently with Goodwill in the
last couple of years.

Anyway, while the "experts" were giving Shigeta the final
count back in April of 2000, he appeared to realize that
the dotcom meltdown was bigger than he was, and there was
really no point in trying to assuage the markets that
everything would be alright -- well, actually he did try,
but only for a few weeks. Instead, and certainly to the
disappointment of the shareholders, Shigeta decided to
stop listening to the criticisms and instead went to
ground. He set about figuring out with a couple of key
senior managers how to staunch the losses, and to get back
to the basics of business -- in particular, figuring out
how to make do with the remaining money that he had.

He decided to keep things simple. Investing in other
companies required too much distributed intelligence and
was too far removed from his core skills of motivating
and disciplining a mass of troops, so he had the investment
team sliced to a skeleton crew, and at the same time
created several new divisions to supplement the sliding
profits of the cell phone business. One of these divisions
was in a business sector that no other company really
wanted to do or compete in -- selling boring old
photocopiers and replacement toner and paper.

But when you have a willing army you can sell anything,
and this is what happened with Hikari Tsushin.

Over the last 7 years, Hikari Tsushin has pretty much
ignored the market and investors, and has single mindedly
focused on selling OA-related products to small and medium
sized companies. As a result, the company now has more than
10,000 employees, mostly sales people, and is one of the
biggest resellers in its sector. Shigeta's street fighter
tactics are very much in evidence, and the sales staff are
required to push themselves and their customers to make
money. This is a hard way to make a living as we heard 3
years ago that turn over of new recruits was about 50% a
year. For most companies, this level of turn over would be
cause for concern, but when you only need a few hours to
teach a new recruit how to use and supply consumables to a
photocopier, for Hikari it is simply collateral damage.

Hikari Tsushin's stock price is still extremely low (PER
of 10.2) in our opinion and investors seem to still be
giving the company a wide birth. But we don't think Shigeta
really cares now. Just last week the company released its
6-monthly financial statement that although there was a
drop in profits, nonetheless, the firm managed to earn a
small but respectable operating profit of JPY12.6bn
(US$122m) on sales of JPY223.1bn (US$2.166bn). Ironically,
much of the improvement is coming from the sales of cell
phones for KDDI and who else? Softbank. On a consolidated
basis, it also looks like some of the old investments are
coming good as well.

So it may have taken a biblical 7 years to Hikari Tsushin
to come right, the moral of this story is simple, when the
going gets rough, bet on the jockey, not the horse.

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+++ NEWS

- Foreigner crimes down
- High-cost office space demand softening
- Overseas M&A predicted to rise
- JAT shares up after foreign ownership OK'd
- High-speed Internet satellite

-> Foreigner crimes down

The National Police Agency said that the number of crimes
committed by foreigners in Japan last year fell by 10.8%
from 2006. The total number of crimes were 35,800, of which
25,753 cases involved actual physical crimes (versus
overstayers). Amazingly, while the number of crimes has
dropped, the NPA reckons it needs to crack down even
further on foreigners to prevent a return to the peak
figures recorded in 2005. ***Ed: Why don't they spend some
time cracking down on domestic child abuse instead?**
(Source: TT commentary from, Feb 28, 2008)

-> High-cost office space demand softening

We predicted the top of the office market in mid-2007, when
it was obvious that most Japanese companies could not
afford the exorbitant rents being asked for downtown
A-class office buildings. Now it's official. According to
office realtor companies interviewed by the Nikkei, demand
for space priced at JPY50,000/m3 or higher began to
noticeably soften at the beginning of this year. As a
result, some new A-grade buildings downtown now have
significant amounts of unoccupied space, pushing the
vacancy rate for these types of buildings up to 5%. Overall
office vacancy rates in downtown Tokyo are still low, at
around 1.75%. ***Ed: 3% is considered the point at which
the pendulum swings to become a buyer's market.** (Source:
TT commentary from, Feb 27, 2008)

-> Overseas M&A predicted to rise

Reuters has a good article speculating that the conditions
are ripe for Japanese firms to go on the M&A hunt overseas
again. It has been more than a decade since Japanese firms
were in as good financial condition as they are now.
Reuters points out that Japanese majors are cash-rich, the
yen is at its strongest in 3 years, and investments in
companies in the Western world in particular have virtually
frozen. According to Thomson Financial, Japanese foreign
acquisitions rose last year, up more than 100% from 2003,
to reach 349 deals worth US$25bn. (Source: TT commentary
from, Feb 28, 2008)

-> JAT shares up after foreign ownership OK'd

With the apparent decision by government not to limit
foreign ownership of Japanese airport terminal operators to
less than 30%, the shares of Japan Airport Terminal (JAT)
jumped 8.6% overnight. The move to possibly limit foreign
ownership to less than 20% was prompted by Australian asset
manager Macquarie Airports and related investors acquiring
19.89% of JAT. Macquarie Airports' owns 72% of Sydney
Airport, 54% of Brussels Airport, 32% of the UK's Bristol
International Airport, and 53% of Copenhagen Airport.
(Source: TT commentary from, Feb 28, 2008)

-> High-speed Internet satellite

The National Institute of Information and Communications
Technology has launched a new communications satellite
whose purpose is to provide a shadow high-speed Internet
network to rural users unable to take advantage of the
nation's already formidable fiber optic network. The Kizuna
satellite was launched Saturday last week and will provide
-- get this -- broadband download speeds of up to 155Mbps
and upload speeds of up to 6Mbps! Pricing for the new
service is not yet disclosed but is expected to be on a par
with NTT's existing 100Mbps fiber service, which currently
sells for about JPY4,500/month. ***Ed: Life among the rice
paddies will never be the same again.** (Source: TT
commentary from, Feb 25, 2008)

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



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