TT-522 -- English schools have a bad year, 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, June 21, 2009 Issue No. 522

+++ INDEX

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

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+++ WHAT'S NEW

Last week the ex-President of Nova Corporation, once
Japan's largest English school chain, was in court to
answer charges of embezzlement prior to the failure of his
company. According to the prosecutors, Nozomu Sahashi (also
known as Saruhashi) diverted about JPY320m (US$3.3m) from
Nova Corporation, to pay student fee reimbursements of a
related company.

To be honest, we're surprised that this is the worst thing
the prosecutors could come up with, because moving money
between companies is common practice for conglomerates,
especially if related firms are in trouble. Indeed, it's as
simple, and legal, as making an intercompany loan. Maybe
he didn't do the paperwork and so there is a case to answer
for, but we'd be surprised if it will amount to prison time.

Sahashi finally coming to trial reminds us of the downfall
of not just Nova, but also the general post-Nova malaise
which is affecting the entire English learning industry in
Japan. The late-2007 images of students and teachers alike
being left out in the cold after Nova went under have
clearly been burned into the public's subconscious. Trust
in English schools in general is at a low, and the current
economic difficulties simply compound the situation by
preventing workers from investing in language for their
career development.

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[...Article continues]

According to the Nikkei, there were about 4.51m people
enrolled at foreign language schools around Japan in 2008
-- this information apparently comes from statistics
collated by METI. Although this number includes those
learning foreign languages and presumably foreigners
learning Japanese as well, we can imagine that at least 4m
would be those learning English in the conventional way --
by attending English language schools.

The 4m number also includes all ages, from seniors
through to kids -- so if we were to slice this number some
more, we could probably say that around 60%, or 2.4m, are
people of working age -- i.e., the bulk of people who would
have been most hurt by Nova going under, due to the large
amounts they were having to pay as tuition deposits.

What's interesting is that if you look at the companies
remaining in the market since Nova imploded, none of the
majors seem to been able to step in and steal significant
market share. Indeed, by our estimates, the five largest
schools between them probably don't teach more than
500,000 students and thus we can see that the industry is
highly fragmented. This is quite unusual in Japan, where
normally there is one massive incumbent taking a
70%-80% market share, then leaving mere scraps for
everyone else.

This fact tells us that no one so far, including Nova
earlier, has figured out how to systemize the
English-teaching business, and that there are lots of
students who appear to be happy studying in smaller
schools. Perhaps the human element of local teachers you
know and trust is still very important. Or perhaps it means
that Japanese business owners and managers haven't figured
out yet how to extract the best business growth and
financial results from their foreign teacher employee base.

For example, right now the marketing focus of most schools
is on cheaper lessons and variations of private lessons
and smaller classes. This is all well and good, but smaller
classes are not cheap to do, so using simple Psych 101
theory, it would follow that popular teachers should be
trying to convince their students that better quality
learning means more one-on-one teacher time, and thus
higher fees. We appreciate that many teachers may not see
themselves as salespeople out to extract more value from
their students. However, if some enterprising CEO could
come up with a strategy that allowed popular teachers to
overcome this reluctance, then with the right in-house
training and incentives, that school could be pulling in
much better margins and therefore grow more quickly.

Also, as far as we can see, very few schools are competent
in using IT and automation in educating their students.
This is starting to change now, but it is still quite noticeable
in the larger chain schools, that confidence in using IT is
low. Experimentation is going on, but no one in Japan has
created a convincing improvement in learning speed or cost
by using technology yet.

So how bad is the English-language education market, for
adult students, at the moment? Unfortunately only two of
the top ten foreign language companies operating
domestically are publicly listed, so we can't get accurate
numbers for the others. However, both Benesse and Gaba
have published recent numbers and both suffered significant
decreases in profit in the last 12 months. This must surely,
then, indicate that things are not well in the industry.

1. Benesse
Most of Benesse's business in the foreign language sector
is performed by Berlitz International, although Benesse
does have some other holdings in the industry in Japan as
well. Sales for FY2008 through to March 2009 were JPY68.4bn
(US$700m), and Net Profit was JPY4bn (US$41.2m), down a
whopping 37% from FY2007's JPY6.4bn (US$66m). According to
Benesse, this loss was primarily caused by goodwill
amortization and foreign exchange losses after remittances
from overseas operations. However, we'd hazard a guess that
a third reason is simply that the average person outside
Japan as well as domestically is struggling to pay the
higher-level Berlitz fees, and companies who might normally
sponsor them are cutting back as well.

2. GABA
GABA is a good reference English school to look at when
trying to figure out where the industry is going. This is
because not only is the company and its financials public,
but the management is willing to try whatever it takes to
make the business grow and profit as well, and have
proven themselves to be capable marketers. They are also
more focused than giant Benesse, and so their numbers
are easier to crunch.

Gaba was founded in 1995, then subject to an Management
Buy-out in 2004 and refinanced. It went public in December
2006, with a valuation of JPY11.39bn (US$117.4m). Sales in
FY2008, ending December, were JPY9bn (US$9.3m) and the
net profit was JPY278m (US$2.86m). The net profit was well
down on FY2007's JPY522m (US$5.38m) and thus it is
perhaps no surprise that Gaba's market cap on Friday was
just JPY1.228bn (US$12.66m) -- less than 10% of what it
was 2 1/2 years ago.

...And so perhaps Gaba's market valuation tells us what
the public -- only individuals would be investing in such a
small cap stock -- think about the English-language learning
industry. Their assessment is that it's in bad shape and they
don't think it's going to improve any time soon.

********************

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+++ NEWS

- Draconian foreign residency law passed
- Chinese to buy 30% of Laox
- Prius production is pumping!
- Secom becoming a major player in hospitals
- Nissan to make plug-ins in USA

-> Draconian foreign residency law passed

Being a foreign resident in Japan got a lot more difficult
last week, when a new law controlling foreign residents was
passed in the Lower House of Parliament. The rules move
responsibility for registration and control of foreign
residents away from local government offices and over to
the Justice Ministry's Immigration Bureau. Among the other
rather nasty aspects of the new rules are: i) if you forget
to make changes to your registration details, after moving,
changing jobs, etc., you can be fined or your right to
residency can be revoked (i.e., you could be kicked out);
ii) to make those changes, you now have to join what are
sure to be 2- to 3-hour queues at the overcrowded Tokyo
Immigration Center (i.e., if you live in Tokyo), instead of
having the convenience of going down to your local Ward
office; iii) if you are married to a Japanese but for some
reason you don't live with your wife/husband for 6 months,
your spousal visa can be revoked; and iv) if you don't
carry your new Zairyu registration card, even if you are
jogging or swimming, you can be fined up to JPY200,000.
(Source: TT commentary from japantimes.co.jp, Jun 20, 2009)

http://search.japantimes.co.jp/cgi-bin/nn20090620a3.html

-> Chinese to buy 30% of Laox

The fund controlling Akihabara electrical retailer Laox is
apparently in discussions to sell 30% of the retailer to
Suning Appliance, a major electrical retailing company
based in Nanjing, China, for around JPY1.5bn. This will
be the first time that a Chinese electricals retailer has
taken a major position in a Japanese company. ***Ed: A
harbinger of things to come perhaps? Interesting stuff.**
(Source: TT commentary from chinaknowledge.com, Jun 19, 2009)

http://www.chinaknowledge.com/Newswires/News_Detail.aspx?type=1&NewsID=2...

-> Prius production is pumping!

Sorry, couldn't help that headline... :-). Toyota announced
this last week that orders for its next generation Prius
are soaring, and it has an order backlog of 180,000
vehicles in the first month of sales. The new car sells for
JPY2.05m, about JPY250,000 less than the previous model.
(Source: TT commentary from nikkei.co.jp, Jun 19, 2009)

http://www.nni.nikkei.co.jp/e/ac/tnks/Nni20090619D19JF068.htm

-> Secom becoming a major player in hospitals

Although, technically, private companies are not allowed to
own hospitals in Japan, leading security services company
Secom figured out some years ago how to get around the
rules, essentially by incorporating under individual
doctors who do meet the ownership rules but who don't have
the capital to finance a facility themselves. In this way,
Secom continues to ramp up its presence in hospital
ownership -- as a recent Nikkei editorial points out.
Apparently the company now controls 16 hospitals around the
country, representing 5,500 beds and JPY90bn in revenue.
Another way that the company has figured out how to
circumvent the private ownership issue is to integrate
other businesses into the hospital they're financing. Such
is the case with its 11th elderly care facility, located in
Kobe, which, significantly, will be the first that will be
integrated into a hospital. (Source: TT commentary from
nikkei.co.jp, Jun 19, 2009)

http://www.nni.nikkei.co.jp/e/ac/tnks/Nni20090619D19HH033.htm

-> Nissan to make plug-ins in USA

It doesn't really matter whether range-limited all-electric
plug-in vehicles are practical in the USA or not, what
matters is that they LOOK fuel-crisis proof and are cheap
to run. From this point of view, Nissan's Carlos Ghosn is
proving once again to be a master marketer. Nissan knows
that EVs are going to be a powerful point of attention in
the USA, and so has announced that they will be building
their first generation EVs in that country -- to the extent
that they may source their batteries there as well. The
Nikkei says that Nissan is likely to invest around JPY50bn
(US$516m) to build 50,000-100,000 Cube-model EVs at its
Smyrna, Tennessee plant by 2012. It will seek U.S.
government low-interest funding to finance the project.
(Source: TT commentary from reuters.com, Jun 19, 2009)

http://www.reuters.com/article/environmentNews/idUSTRE55I5VG20090620

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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+++ CANDIDATE ROUND UP/VACANCIES

=> BiOS, a Division of the LINC Media group, is actively
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bilinguals.

** HIGHLIGHTED POSITION(S)

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+++ UPCOMING EVENTS/ANNOUNCEMENTS

------------ Terrie's Take in Okayama, Kobe ---------------

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On Sunday July 26, Terrie will hold his Enrepreneurs
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>From JR Sannomiya Station it's just a short 5 min walk down
Flower Road. To register, email seminar@japaninc.com.
For more information please go to:
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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 corrections/feedback this week.

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