Survivors

Back to Contents of Issue: December 2002


Two approaches to survival in Japan's unkind economy: Meet the fighter and the surfer
by Sumie Kawakami
ANYBODY CAN MAKE A buck in good times. But making money now is no easy feat, especially if you've had to maneuver your business through the bleak conditions of the 1990s. It was Albert Camus who said, "What doesn't kill me makes me stronger," and two businessmen -- H.I.S. president Hideo Sawada and Goodwill Group CEO Masahiro Origuchi -- seem to have taken the French writer's words to heart.

Of course, both Sawada, 51, who is also chairman of Skymark Airlines, and Origuchi, 41, downplay the idea that they have "made it back alive" from the wreckage of the 1990s. Sawada, for one, points out that H.I.S., parent company of No.1 Travel, one of the largest travel agencies in Japan, has never gone in the red in its 22 years of business. Likewise, the people at Goodwill Group, Origuchi's outsourcing firm specializing in routine temp work and home nursing care for the aged, claim that the company had only a couple of bad years as it launched a new business in the new market of home nursing.

But let's face it: Both companies suffered, and both are now doing well in an unfriendly economy. How did they do it? For one, they did what many companies have been unable to do: They tapped domestic demand.

The two shacho, 10 years apart in age, started their entrepreneurial careers in different socioeconomic settings. Having founded H.I.S. in 1980, Sawada calls his business an "old venture." When he started out, there was virtually no venture capital, no "angles." Waves of deregulation were yet to come, and the Japanese government and banks had little incentive to support venture firms. Origuchi, on the other hand, started his first business -- discos like Juliana's and Velfarre, in the heart of Roppongi -- in the early 90s. It took Sawada 15 years to go public; it took Origuchi only 2.

What the two have in common, however, is their readiness to change their ways when necessary, their instinct for what consumers want, and their determination to succeed.

The Fighter
Sawada is known as an advocate of deregulation. Be it market domination by established giants, bureaucratic control over industry or other structural impediments, Sawada has made a career out of fighting obstacles that get in his way. When he entered the travel industry in 1980, it was dominated by big name agencies such as Japan Travel Bureau (JTB) and Kinki Nippon Tourist (KNT). Nobody expected Sawada's tiny startup to one day compete with these giants. The same was true when he started Skymark Airlines in 1998; skeptics asked why on earth Sawada would even think about challenging Japan Airlines and All Nippon Airways.

Sawada is used to being challenged by companies with more muscle. When H.I.S. placed a large buy order for tickets on one particular airline in its early years, other travel agencies pressured the airline not to sell to H.I.S. Wholesalers sometimes refused to give him choice tickets during peak seasons. Skymark's airplanes, until recently, had been forced to take off or land at the gates farthest from airport entrances.

Sawada has also steered his companies through the collapse of the bubble economy in the early 90s, the impact of the Gulf War, the end of the IT bubble at the turn of the century and the 9/11 attacks in the US last year.

But Sawada doesn't seem like a fighter in person. He smiles and says that fighting "wasn't my intention. In retrospect, though, I did fight because it was necessary for our survival, while those that didn't have disappeared. More importantly, I acted on what I believed: Prices (of airline tickets) were way too high in Japan by any international standard and the (overseas traveling) market was going to be big."

When he was in his early 20s, Sawada went to what was then West Germany to study. During his four and a-half years in university, he organized sightseeing tours for Japanese travelers. That was a time when $1 was worth JPY360, but he made enough to pay for his education and to travel through Europe, the Middle East, Asia, Africa and India.



Upon returning to Japan, he thought something was definitely wrong with the travel market. He recalled: "When I came back, airline tickets were all priced the same, whether you flew with JAL or another carrier, whether you bought your ticket from JTB or KNT, or whether you made reservations early or late. And they were extremely expensive. What amazed me more was the fact that the Japanese people didn't think it was strange." The young Sawada pondered why a Japanese person would have to pay double the price a European would pay for a ticket. "I was sure I was right to think this way and other consumers would agree with me," he says.

Sawada also saw the potential of the overseas travel market. When he returned to Japan in the 1970s, he recalls, "Only 3 million Japanese traveled abroad annually. That was only 3 percent of the population, compared with 10 to 15 percent in Europe. I was sure that the number would go up to 10 percent -- about 10 million -- soon."

This conviction pushed him to start a discount airline ticket office in a dilapidated corner of West Shinjuku in 1980. Word of mouth spread slowly and his office gradually became a favorite place for backpackers to hang around. Some of them joined the company, while others became the company's core clients. Business increased. Sawada admits the bubble economy during the 80s worked in his favor, but even after the collapse of the bubble, the company's sales continued to rise, reaching over JPY23.5 billion in 1990 and JPY 51.2 billion in 1993.

Initially, H.I.S. was focused on niche markets. The company would sell to travelers spending two weeks in India without an itinerary, for example, or to No.v 1 Travel, which offered English services. As the company grew bigger, however, H.I.S. gradually took on more services and products designed for the masses, such as packages to Hawaii. "Hawaii used to be a place people hoped to visit once in their lifetime," Sawada says. "Traditional package tours are still designed for those types of travelers. But Hawaii today has a totally different meaning. Young people have been there at least twice or three times already; they went there as students and perhaps as newlyweds. Yet most tours are still four-nights-six-days with one day of sightseeing. Instead, we offer different options for second- or third-time visitors --allowing them to choose their hotels, airlines, et cetera."

H.I.S. has become the second largest travel agency in Japan after JTB when it comes to overseas travel. Its annual sales are well over JPY200 billion. H.I.S. also has a 31 percent share of Skymark. The airline has just three airplanes, but its discount tickets, especially on the heavily traveled Fukuoka-Tokyo route, have helped it build name recognition. H.I.S. is now headquartered in the spacious MarkCity building in Shibuya, a mecca for Japan's youth, who are the company's main clients.

H.I.S. is not immune to the prolonged recession, however. The impact of the 9/11 attacks on the global tourist industry have also dealt the company a serious blow. The company doesn't expect the drop in annual sales and earnings to stop until fiscal 2003, which runs through next October. It projects sales of approximately JPY250 billion for fiscal 2002, about the same amount as last year, but its current profits may decline by 25 to 30 percent.

However, H.I.S. has been resilient. "The decline in the firm's sales for overseas travel has been smaller than its competitors'," says Yukari Shimaji, analyst at JP Morgan Securities. In the latest half-year financial results through April, the company's sales declined by 10.9 percent from a year earlier, while average sales of 50 travel agencies in Japan dropped by over 30 percent. Another analyst at Shinko Securities pointed out that between March and April -- when Japanese universities have spring breaks -- the firm's revenue dropped just 5 percent year on year, although a 10 percent decline was expected. By this September, the company's monthly sales recovered to two-digit growth, while many of its competitors are still struggling.

The company is more resilient than most because it deals with a smaller percentage of group tours or corporate clients whose travel budgets are more affected by outside factors, says Shimaji. H.I.S. has a higher percentage of repeaters who are used to traveling, she adds. Moreover, the company's clients are younger than those of JTB or KNT.



But Shimaji is not as optimistic as Sawada on the company's prospects. She points to several factors that may hold H.I.S. back: concerns over possible terrorist attacks have not withered away completely; the future of the Japanese economy is still unpredictable; and the opening of the second runway at Narita International Airport may trigger a glut of flights. On the other hand, Shimaji says positive elements are starting to emerge. A new computer system the company introduced this fall is expected to increase efficiency, while a subsidiary of H.I.S., MAP International, is expected to be profitable soon.

Sawada agrees that the higher percentage of repeaters has been the company's strength. When asked what strategy H.I.S. has to make it through bad times, Sawada says, "We are young compared to our competitors and we are much more fit to change ourselves in accordance with outside changes."

Even his staff is young. The company's average employee is 27 years old, while the average age of employees at other major travel agencies in Japan is over 40. When you walk into H.I.S. headquarters, you are greeted by voices calling out irasshaimase ("welcome"). Skeptics say this is just another "McDonald's smile" the company forces its employees to wear, but H.I.S. is one of the most popular companies to work for among new university graduates.

"Keep your senses sharp and be alert for changes" is Sawada's motto. He doesn't wear a watch or carry a keitai in the belief that these modern technologies will dull his senses. "Recessions, advancement in IT and terrorism -- the modern society is changing rapidly and we are trying to change ourselves to go with it," says Sawada. "Our competitors are trying to change their ways, too, but their organizations are too huge, their cultures too firmly established, and their staff too old. It's harder for them to change. The more rapid a change is, the harder it is for them to take it and the easier it is for us," he says.

Part of the company's strength may come from Sawada's own love of traveling. Even today, he manages to take off every now and then -- sometimes for months -- to travel alone with only a backpack. Wherever he goes, he talks to fellow travelers and asks what they like to do, where they want to go, where they bought their tickets and why, without disclosing his identity. "We don't know what is popular unless we actually take the time to go there, " he says. "I encourage our staff to travel, too."

While H.I.S. is a success, how about Skymark? According to Shimaji, the future of Skymark is still unpredictable. This year alone, the company introduced its third airplane (though its cost has not yet been covered), opened the Kagoshima-Tokyo route and flew its first charter plane to South Korea. Skymark's losses increased to JPY780 million during the last half year through April, compared with losses of JPY670 million in the previous half.

"It's hard to get customers," Sawada admits. "There are too many regulations. We have to compete with giants like JAL or ANA whose revenues are 100 times bigger than ours. Plus, we've had so many obstacles, such as bad counter locations or boarding bridges."

Skymark's aggressive pricing policy on the Tokyo-Fukuoka route triggered a price war as JAL and ANA quickly followed suit by drastically cutting prices. Cutthroat competition also began on the Tokyo-Kagoshima route as soon as Skymark entered the picture. "We've had a hard time. (Entering the airline business) may have been something I didn't have to do," Sawada says. "From a business perspective, it may not have been wise. But, it turned out to be a good thing for citizens as well as other airlines. They've realized that this is the world of competition."

Skymark intends to keep on fighting. "Having been kicked around for three years, taken it all and survived, the business is getting into much better shape. Of course we cannot be off our guard yet, but we are starting to feel a favorable wind," Sawada says. Over the past three years, the company has cut costs by doing more work in-house. It now trains its own pilots and flight attendants, and some maintenance work is done by its own mechanics. The company used to outsource all of this to ANA, which was expensive. "ANA is becoming more and more cooperative with us now that we have started to do some of the work in-house, which I consider a victory of perseverance," Sawada says.



The company is losing money on its hotel business in Australia's Gold Coast. "A hotel business takes longer to become profitable, despite the fact that it requires a huge initial investment," Sawada says. "I don't have a plan for expanding the business now." But when asked whether he has any intention to sell the hotels, his answer is no.

Analysts say the merger between JAL and Japan Air Systems this year is just the beginning of a new era. H.I.S. has so far remained independent, but how does Sawada expect H.I.S. to survive alone? Sawada readily admits that some kind of alliance may be necessary in order for a small company to survive. "Some time down the road, we may consider the option of a business alliance or capital alliance if that would be a plus for us, although I will avoid as much as possible a situation where we lose our independence," he says. Sawada's next step is to make H.I.S. an international company. "H.I.S. has become famous in Japan, but not in Asia," he says. "I want the company to be one of the top three in China, Europe or the US. That is my next objective."

The Surfer
At the young age of 41, Origuchi has already ridden some big waves: He was the "emperor of discos" and the maestro of the Juliana's disco craze in the early 1990s; he tapped into Japan's free-taa culture, where young adults avoid full-time jobs and drift from one part-time job to the next; and he is now becoming a leader in Japan's home nursing care industry.

Origuchi has a knack for finding his own way. After graduating from the National Defense Academy, he joined major trading firm Nissho Iwai instead of becoming a soldier. In 1991, while he was still with the trading firm, he produced the popular disco club Juliana's. Under Origuchi's direction, the disco soon became an icon of Japan's nightlife, forever emblazoning in the nation's imagination the picture of scantily clad young women dancing on an elevated stage, teasingly exposing their underpants to the crowds below.

Origuchi left Nissho Iwai to start another club, Velfarre. Soon after the disco opened in 1993, it became a huge success. But he didn't remain in the world of nightclubs. Using his networks of young people who hung out at discos and were in need of temporary jobs, he founded the temp agency Goodwill Group, which specialized in short-term routine work. That was in 1995, when the lifestyle of the free-taa was just beginning to emerge. Soon the temp business grew, and Origuchi gained fame as a successful entrepreneur. However, he wasn't satisfied yet. He again started a new business in the field of home nursing care for the aged under a subsidiary to Goodwill called Comsn.

As Origuchi explains it, he was just following the latest wave and riding it out. But some felt he was doing more than following trends -- he was making them. He was known as "The Trend Surfer," but he says the depiction isn't necessarily true. "When I entered the disco market, for example, everybody thought that the disco boom was already over as a new trend of Ôclubs' was on its way," he says. "But I thought the trend didn't really matter as long as I did something many people wanted. I believe any business -- even if everybody else thinks a trend that would support that business is over -- would go well as long as you stick to basic business principles."

But Origuchi certainly had good timing with his nursing care business. Comsn started its business just when Japan was about to change the legal framework for home care for the aged. Before the enactment of the Home Nursing Care Law in April 2000, nonprofit organizations were the typical care providers for the elderly. But with the sharp increase in demand for such services, the government began encouraging private firms to enter the industry. Under the new law, part of home nursing care is covered by national health insurance.



But Origuchi says the reason he decided to enter the market had less to do with the law per se and more to do with the potential of the market. "When I decided to enter the industry, nobody was sure whether the Diet would the pass the law," he recalls.

Origuchi's experience caring for his father during his illness gave him expertise on the subject of home care, but he says he wouldn't have entered the business only because of an emotional sense that the service was needed. He knew the market would grow as Japan's population ages, and the business would succeed as long as he could provide what his clients really need. He also felt there was a lack of good services with reasonable prices.

Despite his unconventional career, Origuchi appears to be a serious, determined businessman. Goodwill Group's headquarters are still located in the same narrow building in the middle of popular nightlife spot Roppongi in Tokyo; he doesn't believe in moving to a fancier place. As you walk into his office, the first thing you see is a huge framed piece of calligraphy saying, "Unstoppable Venture Spirit." Origuchi elaborates on the motto: "Always be hungry, challenge new things and expand. And keep doing it, whether the economy is good or bad."

The shelves in Origuchi's office are lined with hundreds of business books along with biographical novels of famous historical figures, such as Oda Nobunaga and Tokugawa Ieyasu, whom he admires.

"Ever since I was a little child, I've always wanted to become someone big," Origuchi offers. For him, becoming an entrepreneur was part of his plan. His father was also a company owner.

Outsourcing makes up more than 60 percent of the Goodwill Group's sales. It has become the leader in outsourcing for routine labor such as moving, construction and warehouse management after acquiring its third largest competitor, Lineup, last year. The timing was good: The concept of outsourcing was just beginning to be accepted and recognized by Japanese society. And the need for temporary workers has been increasing.

Meanwhile, Comsn, which earns over 30 percent of Goodwill Group's sales, is now the biggest service provider of home nursing services for the elderly on a profit basis and the second largest in terms of sales.

But things haven't always been easy for Origuchi. Mariko Watanabe, an analyst at HSBC Securities, says that Origuchi's reputation suffered a lot in fiscal 2000 and 2001, when the firm posted consecutive negative earnings reports. First of all, Watanabe says, Comsn wasn't profitable. For the first fiscal year after the introduction of the new home nursing law, it reported a JPY18 billion loss. On top of that, Goodwill Communications, whose main clients included Hikari Tsushin, had been suffering after the plunge in Hikari Tsushin's performance. The consensus among investors around the time of Goodwill Group's successful IPO in 1995 was that the company diversified too much, dabbling in everything from temp agencies to aesthetic salons.

Having sensed the unease among investors, Origuchi decided to drastically restructure. The company sold Goodwill Communications and part of its aesthetic salon business last year; it removed its financial business from the group's consolidated structure this year. As a result, the number of the company's consolidated subsidiaries was reduced from 21 in January 2001 to three by April 2002.

And that's how Goodwill Group returned to fiscal health. In the most recent fiscal 2002 financial report, it posted a current profit of JPY3.5 billion, the largest ever. Watanabe says that it was largely because Comsn is expanding steadily after becoming profitable in April this year, and because its main outsourcing business is recovering from the prolonged recession.



But Origuchi denies his company ever came close to a near-death experience. "Our businesses in a real sense have never deteriorated, nor have we ever failed. I'm not saying this because I want to make myself look good. My policy is to say what is really true or right.

People would be happier if they hear me say, ÔYes, we turned bad but became better because of your support. Thank you.' But I won't say it because I knew exactly what I was doing."

So if his businesses didn't deteriorate over these past two years, what exactly happened? Origuchi shrugs and says, "First of all, Goodwill alone has always achieved annual growth both in sales and earnings. The initial two years of Comsn happened to coincide with the same period when we took on massive restructuring (and posted losses). We had some structural problems we'd carried since our establishment; it wasn't that our businesses turned bad over the period. As a result of restructuring, we have solved the structural problems. As far as Comsn is concerned, my view is that we did strategic investment during those two years because of the enactment of the law and that we've finally reached a point where we can take returns on the investment."

He continues, "Comsn was in the red just because it is in the service sector. If you are a manufacturer and build a factory, you could claim it as an asset and your expense would be smaller. In the service sector, however, everything becomes an expense. That's a significant difference."

As for the criticism of Comsn's expansion strategies, Origuchi says expansion followed by massive downsizing was part of his strategy. "I understand some people were perplexed about the fact that we initially opened 1,000 service centers, then reduced the number to 300," he says. "But this is exactly the essence of a venture business. Yes, the law was enacted, but we had to start with no sumo ring. We knew a lot of the audience would show up once we created the ring and let people know about it. There is a time lag. Some people argued that there wasn't that much demand, but I say there was. To support what I have just said, every center became profitable within a year after we cut the number to 300. You may say, ÔWhy didn't you start with 300 initially, then?' Because we initially start with 1,000, all 300 became profitable. If we had started with 300, we may have ended up with only 100 profitable ones."

After turning every center profitable, Comsn again started to expand. By the end of August, Comsn had 383 centers across the country. It plans to expand further. Watanabe of HSBC thinks they're on the right track: "Comsn has established a business structure in which it can secure JPY100 million operating profit a month. The company plans to increase the number of service centers by 100 this fiscal year. If the current pace is maintained, the company's performance is likely to go beyond its projection in this fiscal year." The company may use some of the excess to cover future expenses, Watanabe says, and final profits will be somewhere close to the company's projections. In this fiscal year, Comsn projects JPY22 billion in sales with JPY1.7 billion in current profits -- more than double the previous year's totals.

The outsourcing business is also expected to grow further. In Japan, there are more than one hundred small outsourcing companies, but Goodwill Group has the names of more than 650,000 registered staff members -- mostly young free-taas -- stored in its database, putting the company in a very advantageous position. Sales of No. 2 outsourcer Fullcast are slightly over half of Goodwill Group's. Watanabe predicts that Goodwill Group's performance will improve this year.

However, Goodwill Group is not without risk. One of the main strengths of its outsourcing business is that the company's contract with its staff covers only actual days of labor. Since Japanese laws exempt temp workers with contracts of less than two months from labor protection, the company has no legal responsibility to cover their social insurance, pensions or retirement plans. But Watanabe points out that the government is now putting more emphasis on the protection of temp workers, and the company's profitability may suffer if any change in the current system should occur.

But Origuchi sets his goals high. His next goal is to move Goodwill Group from Jasdaq to the first section of the Tokyo Stock Exchange. The TSE is considering lowering requirements for IPOs, and Goodwill Group is planning to apply. If TSE approves Goodwill's application as early as next spring, the company would become the first to be listed on TSE's first section within eight years of launching its business. Origuchi shrugs it off. "We've been planning to go to the TSE first section regardless of relaxation of requirements," he says. "The timing will be faster. That's all." @

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