Business must sink or swim with the Net

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Kazuhiro Miyatake’s decision to place his century-old umbrella shop on the Internet has given his business a new lease of life. E-commerce, like his merchandise, has offered shelter from a gloomy commercial climate.

“If business had been good, I wouldn’t have had to concentrate on the Net,” said the “Webmaster” of kasaya.com, which sells umbrellas online at prices ranging from 2,000 yen to 200,000 yen.

While just about everyone is scrambling onto the e-commerce bandwagon for new business opportunities, Miyatake, 41, said he had no choice when his store “Shinsaibashi Miyatake” faced difficulties with rent, payrolls and excessive inventory amid the lingering recession.

But since the store’s relocation from a bustling Osaka street onto the Net in January 1997, Miyatake’s venture has gradually begun to pay off.

Now, with kasaya.com turning over nearly 4 million yen a month and a branch that opened this month at Rakuten Inc., Japan’s largest cybermall, Miyatake is determined to link the fate of his business with that of the Net.

“The Internet lets you expand business opportunities nationwide in a short period of time, if you have a knack and devotion for your business,” Miyatake said at his tiny home-cum-office in Osaka’s Nishinari Ward.

With half Japan’s 15 million Net users shopping online, electronic commerce is bringing about the so-called information technology revolution.

“What’s revolutionary about e-commerce is that it not only enables you to buy goods from a distant shop, but it also enables buyers and sellers to deal directly with each other without the cost of margins paid for intermediaries,” computer architect Ken Sakamura says in his recent book “Global Standard: Computer Science.”

“It also makes it possible to sell products without a (bricks-and-mortar) store or extra expenses.”

Keio University professor and economist Heizo Takenaka has been more blunt in describing the ongoing upheaval in his writings and lectures: “Bringing the cost of business transactions as close to zero as possible is what the IT revolution is all about.”

Indications of the cost-slashing potential of IT are also starting to be seen in Japan. For example, following the liberalization of securities brokerage commissions last October, commission rates on Net trading were slashed by an average 60 percent as of the end of last year, while those for transactions done at brokerage counters fell about 10 percent, according to the Japan Securities Dealers’ Association.

Although Japan lags a few years behind the United States in business-to-consumer (B-to-C) e-commerce and a year behind in business-to-business (B-to-B) e-commerce, business confidence has grown in the past year or so, creating an environment in which e-commerce can catch on here, said Rakuten Executive Vice President Haruko Shimoyama.

“Every month, 250 to 300 new shops open at Rakuten,” she said.

Starting with 13 online stores in May 1997, the mall now boasts more than 2,300 stores with nearly 200,000 items of merchandise available via the site.

“Books and personal computer-related items triggered the e-commerce explosion in America. But here local delicacies sent direct from production centers, sundries, interior decorations, designer brand goods and fashion-related items are also popular — particularly among women,” she said.

According to a survey of 263 e-commerce servicing firms conducted last October through December by Andersen Consulting and the Electronic Commerce Promotion Council of Japan, Japan’s B-to-C e-commerce will reach 6.7 trillion yen in 2004 compared with 336 billion yen last year.

Boosted by transactions in areas such as automobiles, travel and real estate as well as personal computer-related items, the probe predicts that, around that time, 2 percent of household consumption will be via electronic transactions.

As for B-to-B e-commerce, the market will grow from 8.6 trillion yen in 1998 to 68 trillion yen in 2003, according to a separate survey of 160 leading Japanese companies conducted from November 1998 through March 1999 by the Ministry of International Trade and Industry and Andersen Consulting.

Goldman Sachs predicts that B-to-B e-commerce alone could boost Japan’s gross domestic product by 5.8 percent by 2010, with the equity market becoming the major beneficiary due to higher corporate output and profits despite some shrinkage of profit margins in suppliers of intermediate goods.

Such a rosy picture, however, will not come without thorns.

A considerable degree of “disintermediation” — the elimination of incompetent middlemen — will take place, Tama University professor Iwao Nakatani says.

Nakatani, who is also an outside director of Sony Corp. and director of research at Sanwa Research Institute, estimates that excessive intermediate transactions currently account for roughly 30 percent of Japan’s GDP.

A prime example of the phase-out of intermediaries is Dell Computer Corp.’s direct-sell model, which lets customers have computers built-to-order and delivered at a discount directly via the Net.

“IT is replacing the traditional market’s role in matching supply and demand,” he said.

With customers empowered by IT for direct communication, companies need to be able to accurately and instantly grasp what is in demand, thus drastically reducing “in-between” transaction costs and avoiding the risk of having excess inventory and capacity.

“Those who make a living simply by relaying information between suppliers and consumers can no longer compete with the one-to-one marketing made possible through the Internet,” Nakatani said. “They must find value-added solution services that look after customers with scrupulous care.”

Still, disintermediation will be inevitable, and it will cause quite a lot of friction throughout society, just as when automation brought by the Industrial Revolution affected manual labor, Nakatani said.

Painful as it will be in the short run, Japan must press ahead with the IT revolution to boost productivity of society as a whole, he said.

While urging the private sector to embrace the IT revolution, Nakatani said the government must prepare a social safety net and formulate measures to redistribute the income generated through the streamlining of excessive intermediaries, which would in turn create new demand, new industries and new job opportunities.

Considering the miraculous recovery and sustained inflation-free growth the United States has enjoyed in much of the past decade, Japan can also follow the path of the IT-driven “new economy” within a few years, Nakatani said.

Some Japanese firms have taken the plunge while others remain reserved.

Sony has recently begun online sales of home appliances for the domestic market, putting at risk the future of its 2,000 affiliated small retailers nationwide.

In contrast, Toyota Motor Corp. has abandoned a plan to directly sell its “Will Vi” new-model mini-cars through the Net, reportedly because of opposition from its “keiretsu” distributors.

“Such reports are not quite true,” said Hideaki Honma, a coordinator of Toyota’s in-house Virtual Venture Company. “After studying direct online sales, we saw that we must depend on our distributors to help customers with registration of their newly purchased vehicles.”

However, Honma said he personally feels distributors will have to improve in areas such as post-sales service to retain customers who are becoming ever better-informed via the Internet.

In the U.S., General Motors Corp., Ford Motor Co. and DaimlerChrysler AG plan to jointly create the world’s largest virtual marketplace.

The auto firms aim to cut procurement costs as much as 50 percent through this venture by dealing efficiently with competitive suppliers, Nakatani said.

In an environment where the Internet provides access to supply-side information at any time, companies will no longer have to rely on fixed and long-standing keiretsu affiliations, although such exclusive networks have served as stable — albeit inefficient — means of procurement and distribution in Japan.

Those who lack a sense of opportunity about IT’s potential and avoid rapid change may go under in a few years, when e-commerce explodes in Japan as Internet access expands via convenience stores and such digital appliances as mobile phones, video games and digital TVs, Nakatani said.

MITI, together with Andersen Consulting, meanwhile, estimates that the effects of IT alone could lead to the loss of 1.63 million jobs in Japan by 2005 as a result of corporate restructuring and changing job specifications.

Simultaneously, the e-economy will create 2.49 million new jobs nationwide, giving a net 860,000 new jobs by 2005.

To meet the increasing need for skilled workers and competent managers, companies must change in a way that attaches greater importance to the specialized skills of individuals, rather than treating them as if they were cogs in a machine in pyramid-type organizations, said Hisashi Yamada, senior economist at the Japan Research Institute, Ltd.

Employees, too, must be ready to embrace structural changes to the labor system by improving their employability, as such postwar phenomena as lifetime employment, seniority-based pay and equal treatment of workers regardless of skill levels disappear.

To avoid a further mismatch in labor supply and demand, companies must also become more flexible in hiring people from outside their organizations, with industry, academia, and the state enhancing joint efforts to develop talented workers.

Yamada urged the government to galvanize measures to introduce IT into school curricula and encourage community colleges and non-profit organizations to help provide middle-aged and unskilled workers with opportunities to be reeducated in IT-related skills.

For Japan to fully enjoy the benefits of e-commerce, numerous obstacles remain also on the policy front.

“There is a mountain of issues to be solved, for example patents concerning IT-related business models, the validity of administrative procedures and business transactions done via the Internet, the effectiveness of laws and systems regarding credit card use and consumer protection,” said Shin Yasunobe, head of MITI’s Electronics Policy Division.

While Japan can catch up with the U.S. in terms of market growth, its legal system, such as slow and ambiguous decision-making by courts and a relatively small number of lawyers, may prevent it from keeping up with a faster pace of technological change.

“Japan’s judicial system may become its weakest point,” Yasunobe warned, citing America’s swiftness in setting a precedent.

Nonetheless, Keio University’s Takenaka appears to have few qualms about the opportunities offered through proliferation of IT. He has said Japan now has a chance to “participate in the (IT) revolution to create a 21st-century lifestyle” with its technological prowess in the field of digital household appliances.

Takenaka compares the Japan of today with that of the 1920s, when it used technological advances to establish a modern urban lifestyle.

Radio sets sold like hotcakes after Japan Broadcasting Corp. (NHK) started radio broadcasting in 1925.

Because the Great Kanto Earthquake of 1923 destroyed much of the Tokyo metropolitan area, the rich left the city center to develop suburban communities, which in turn led to the development of suburban railway connections.

This era saw the first subways built in Tokyo’s Ginza district and Osaka, as well as the completion of Tokyo’s Yamanote loop line. The world’s first terminal department store was also built at Osaka’s Hankyu Umeda Station, Takenaka said.

“We now have a similar opportunity to introduce new technology, build new lifestyle and relevant new industry, and give birth to new business heroes.”