TT-548 -- Trends for 2010, ebiz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, January 10, 2009 Issue No. 548

+++ INDEX

- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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+++ WHAT'S NEW

Welcome to the first edition of Terrie's Take for 2010. We
hope that you were able to recharge your batteries over the
New Year, and have come up with some new year's resolutions
that will create wealth and satisfaction for 2010. We did a
lot of thinking on beaches abroad, considering what might
happen to the world in 2010 and where Japan's strengths and
weaknesses might be.

As a result, rather than try to predict specific events and
times, a set of wild guesses often, this year we thought
we'd take a longer term view and pick out some trends that
we think will crystallize or accelerate during 2010.

Enjoy!

1. China vs. Japan

As we have witnessed in 2009, China is gaining stature in
world affairs, and its actions are starting to matter.
While it would be easy to predict that Japanese firms,
trading firms in particular, will start losing their
predominant position to the Chinese, we see an interesting
counterpoint starting to emerge: this is where
third-country companies are starting to realize that
dealing with the Chinese may not always be a bed of roses
- despite the tantalizing prices being offered -- and are
choosing the Japanese in preference.

A good example of this type of push back can be found in
the Australian agrichemical firm Nufarm, which was made an
Au$2.6bn takeover offer by Sinochem. This was probably a
good price, but Nufarm management said it was too low and
finally went with a much smaller sale of 20% of its shares
to Sumitomo Chemical, for a premium of of an extra 20% per
share.

Looking at the dynamics of this deal, while Sumitomo may
have paid a bit more per share, in the end they still only
had to buy 20% of Nufarm in order to leverage themselves
into that company's sales network as a major partner. More
importantly, the deal allowed Nufarm's management to stay
in place, run their own ship, and still tell their
shareholders that the Sumitomo deal was better.

We see this as a smart piece of strategy by Nufarm's
managers and Sumitomo, and we expect more competition
between the Chinese and Japanese where the choices made are
based on the Japanese being more accomodating. Generally
speaking, we believe that the Japanese are still perceived
as being more reliable and easier to deal with -- outside
of Japan anyway... ;-)

2. Energy Storage Devices

Now that commercially available rechargeable electric
vehicles are almost upon us, the pressure is on globally to
develop energy storage solutions that will move the auto
industry into the world of electric gadgets -- something
that the Japanese know all about. The holy grail is
Lithium batteries and the Japanese are making great strides
in materials science to make them better. Specifically,
they are refining the electrodes so as to take faster
charges and to pack more energy into smaller spaces. Both
Nissan and Panasonic are among the leaders in manganese
cathode electrodes, and Nissan was claiming just last month
that it now has a battery which can power a vehicle for
300km on a single charge -- about double the capacity
possible now. The new battery will be available by 2015,
but in the meantime we can imagine that Nissan's
competitors are working to release even better technology
sooner. Keep a watch on GS Yuasa.

Close behind Lithium cells for the car are storage
batteries for the home -- and these will be badly needed
once the solar energy subsidies now back in place in
Japan really start to kick in this year. Apparently
Panasonic, by virtue of its takeover of Sanyo, now has a
storage battery that can deliver enough energy to power an
average Japanese home for about a week after being fully
charged. This could be a huge new business for Panasonic.
The storage battery will be publicly available sometime
after April 1st this year.

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[...Article continues]

3. Increasing Business Internationalization

While Japan has its ubiquitous international export brands
such as Sony and Panasonic, these companies enjoy their
international standing largely thanks to government
programs put in place 70 years ago. As result, there are
very few newer companies with strong international
profiles, and most prefer to stay in the domestic market.

However, the recession is changing attitudes, and recently
interest in export sales is surging. The hassle of dealing
with foreigners and foreign payments and claims has been
overcome by the need for cash.

The most nimble of this new wave of domestic companies
arose in 2007-2009, when China started opening up to
Japanese exports (China-based manufacturing of course has
been open for years), and further the freight prices
between both countries started falling substantially
because of the increasing volumes.

Among the products being sold abroad are Japanese processed
foodstuffs, fruit, and even some manufacturing again. One
landmark deal that we think will really change Japanese
mid- to small-sized exporter's prospects this year was an
agreement done last year between Alibaba.com, the big B2B
web trading site in China, and Tokyo's Netprice. In the
deal, Netprice is helping Japanese sellers to get their
goods to China, handling language and logistics. This
should be a strong trend as the Chinese perceive the health
and saftey of Japanese food and consumer goods as being
far superior and worth the extra cost and inconvenience to
source. Netprice forecasted last year that by April 2010 it
would have over 500 Japanese small and medium-sized
companies selling under its system.

We have the feeling that Rakuten isn't far behind.

4. Interest Rates May Rise

One question that everyone is asking right now is just how
long the U.S. can keep a lid on its economic turmoil and
keep down interest rates. While the official stance is that
a bit of inflation is good, and certainly this will be the
eventual result of the quantitive easing going on, sooner or
later the dollar will start to slide again in value or interest
rates will have to go up. Nonetheless, we have been
impressed with how the U.S. and other first world
governments and trading partners have banded together to
help the U.S. sidestep potential disaster by all making a
coordinate effort to do quantitive easing together. While
no one has broken ranks yet, we can see that the Chinese
and several other major economic blocs are now starting to
demand concessions from the USA that might develop into
open conflicts and lead to even more turmoil.

In addition to the global economy, the Japanese
government's determination to swell public borrowing to
200% of GDP will probably exceed the ability of individual
Japanese investors to keep buying government bonds. We
expect small lot investments to start drying up later this year.
When that happens, then foreign buyers of JGBs will be
needed and this will automatically drive up local interest
rates. Indeed, a report from the Chief Economist of
JPMorgan Securities said late last year that Japan's
interest rates could rise at least 2% over the next decade
and that government debt servicing costs would increase
400%. Such figures are not really sustainable, and sooner
or later JGB buyers are going to realize it.

5. Green Tech Economy Starts to Take Shape

Droughts, floods, extreme heatwaves and storms. Globally
the last ten years have seen a lot of turbulence from
mother nature and this is creating demand in first world
nations for solutions. We believe that just as photovoltaic
and fuel cell systems are now household sized and priced,
water desalination and purification mini installations are
also not far away. Such systems should find ready buyers
among the drier first-world countries with cities close to
the sea or to bodies of otherwise unpotable water.
Australia and the USA come to mind.

At the end of 2009 the Nikkei reckoned that about 38
Japanese firms were involved in various stages of the
water purification and supply business. Japanese companies
have lots of experience in various types of filtration
technologies and activated materials, including nanofibers,
but are reportedly unable to compete on major projects
or on price. To fix this, METI is setting up a study group
to accelerate the competitiveness of Japanese firms in
water. This seems to be especially important following a
French company, Veolia, winning a Japanese sewerage plant
rebuild contract recently, in competition to the mighty
Ebara Corporation.

6. Food Shortages?

Anybody remember the soy bean shortage of the 1970's? This
period precepitated the first major ructure between Japan
and the USA and highlighted Japan's lack of food self
sufficiency. Back then domestic production covered just 70%
of the nation's needs. Now, because of dietary changes and
the dependency on cheap vegetables from China, the amount
of food produced domestically is even lower -- just 40%
(and this is 2007 figure so its probably even lower now).

Thus, Japan will be supersensitive to any global event that
might impact its key imports such as seafood, meat, and
vegetables -- particularly soy beans.

There is a rumor circulating in the U.S. that although the
USDA is saying there will be a record soy bean harvest this
year, in fact weather impact reports from the same
organization suggest that the growing season has been very
difficult -- particularly in the breadbasket mid-Western
states. We don't know which figures to believe, but the
impact statements say that production in these key states
was down by as much as 30%.

Elsewhere in the world, Argentina's 2009 wheat harvest was
just 8.7m metric tons, down a whopping 50% from its 16.3m
tons in 2008, due to drought. However, Australia and Canada
had increases in production, so these countries will give
the world's bread eaters a reprieve for this year at least.

7. JAL Pensions a Tipping Point?

We find it very interesting that the government is prepared
to dump on JAL retirees and their pension entitlements in
order to put JAL's financial house in order. The right to
receive a steady pension is one of the most basic contracts
the government has made to Japanese society, and chipping
away at the pension amounts has been the focus of many
parliamentary debates. Nonetheless, the pending JAL
bankruptcy will reduce pensions for current employees by
50% and for retirees by 30%. The company's pension fund has
about JPY730bn in payment obligations and is underfunded by
about JPY330bn.

This of course is a situation that is mirrored in a number
of other major domestic companies as well as the
government's own public pension program -- which is likely
to run out of money in the next few years. Thus, we see the
JAL negotiations as being about more than just a deal with
JAL. As a government-owned company in disguise, what
happens to to JAL's pensioners may well set a precedent for
other companies in the future.

If the standard is a 30% cut for JAL retirees, we can
imagine that this may start to come up in future
discussions on how to cut the government pension benefits
as well. This could mean that a pension of approximately
56% of an average salaried person (56% being the so-called
"Income Replacement Ratio") will drop to around 35%. Or put
another way, the roughly 80% average return of your pension
contributions will drop to around 55%.

For an average couple where the husband has worked 40
years, the current pension is around JPY230K/month.
Question is: can an elderly couple actually live on 30%
less than this amount ten years from now?

8. More Tourists

On December 31st, the government said that its 10-year plan
will target a 3% growth in annual GDP, and will do so by
creating 4.76m jobs in the areas of environment, health,
and tourism.

Of these 3 sectors and their value to non-Japanese
business, the environmental sector in Japan generally means
government-funded projects of large scale -- which in turn
means cosy relationships with domestic companies. Strike
One.

In the Health sector, equipment supply opportunities
abound, but actually getting involved in practicing
medicine, or owning an establishment that does, is for all
intents and purposes unavailable to non-Japanese. Strike
Two.

Tourism, however, is an open field, and Japan is becoming
ever more interesting to asians whose own homelands are
either too warm, too crowded, under-developed, or just not
stimulating enough. Japan is still expensive, but the
quality of service, food, shopping, safety, and natural
attractions are such that they will continue to pull large
swathes of people in -- especially as asia is starting to
recover financially from last year. A weak yen will accelerate
this trend.

We expect a big resurgence in inbound tourists from Korea,
China, S.E. Asia, and Europe. These people are all here to
spend money and have a good time -- so what better clients
could you possibly want?

...The information janitors/

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+++ NEWS

- Consumer group opposes JAL tie-up
- NTT Comm buys Swiss online English school
- Console games market shrinks further
- November tax revenues plummet 25%
- Golf operator goes bust

-> Consumer group opposes JAL tie-up

An unlikely source of opposition to the JAL-Delta Airlines
proposed investment/tie-up made itself known this last
week, when US-based Business Travel Coalition (BTC) said
that a Delta tie-up with JAL would not receive antitrust approval.
The BTC spokesperson said this was because between the two
airlines they would control more than 60% of US-Japan
flights. BTC apparently recommends that JAL proceed with
the American Airlines deal and its OneWorld alliance. The BTC
has said that it will lobby the U.S. government to ensure
Delta's is not successful. (Source: TT commentary from
airwise.com, Jan 7, 2010)

http://news.airwise.com/story/view/1262865159.html

-> NTT Comm buys Swiss online English school

Indicative of foreign investments being made by Japanese
firms recently, NTT Communications has said that it will be
buying 29.7% of a Swiss online English School operator
called goFluent. NTT will in fact bring the service to
Japan in 2011, hoping ot garner both business and
individual sign-ups for the service. The purchase price has
not been disclosed, but is apparently in the
JPY200m-JPY500m range. goFluent has about 30,000 users of
its service and last year had sales of JPY1.5bn. (Source:
TT commentary from nikkei.co.jp, Jan 8, 2010)

http://www.nni.nikkei.co.jp/e/ac/tnks/Nni20100107D07JSN05.htm

-> Console games market shrinks further

As Japan's population of kids decreases and market
saturation in games machines occurs, it is not surprising
that sales of console games shrank in 2009. Publisher
Enterbrain says that the market for hardware and game
software dropped 6.9% to JPY542.64bn. Hardware was down
13.6%, evidencing consumer saturation, and software was
down 1.8%. The top three selling software titles for the
year were Dragon Quest IX (Square Enix) with 4,100,968
copies, Pokemon HeartGold/SoulSilver (Pokemon) with
3,382,597 copies, and New Super Mario Bros. Wii (Nintendo)
with 2,485,150 copies. (Source: TT commentary from ign.com,
Jan 3, 2010)

http://au.ps3.ign.com/articles/105/1058229p1.html

-> November tax revenues plummet 25%

The financial crisis is not yet over, despite the
improvement last year in the stock market. Proof of this
can be found in the fact that the government's primary
source of income, taxes, dropped a punishing 25.6% in
November 2009 compared with the same period in 2008. At
this rate, fiscal year 2009 overall tax revenues may fall
below JPY37trn (US$399bn), less than half the income needed
to pay the operating budget of the government and its
thousands of agencies. Corporate tax was most severely hit,
being down by 69.5% in November versus the year before.
(Source: TT commentary from reuters.com, Jan 2, 2010)

http://www.reuters.com/article/idUSTOE60305020100104?type=marketsNews

-> Golf operator goes bust

As a sign of the ongoing problems in the resort and golfing
business. golf course operator Asahi Resort Kaihatsu went
bust last week, with JPY18.7bn in unpaid debts. Asahi
operates just two courses, one in Hiroshima and the other
in Tottori -- which makes one wonder how they were allowed
to rack up such a huge amount of debt? ***Ed: In any case,
interesting to see these smaller operators continuing to
drop like flies, even while gaijin-run Pacific Golf and
Accordia are logging modest growth and their courses
continue to be popular. Vision, quality of customer
experience, size and efficiency are clearly the keys to
success in what has otherwise been a cottage industry.**
(Source: TT commentary from nikkei.co.jp, Jan 9, 2010)

http://www.nni.nikkei.co.jp/e/ac/tnks/Nni20100109D08JFA19.htm

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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------------------ ICA Event - January 19 -----------------

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

+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors@terrie.com.

*** No comments or feedback this week.

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

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+++ ABOUT US

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

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