Hurry up & Wait: Electronic Commerce in Japan
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Will this be the year of the EC-Bang in Japan? In the short-term, many barriers to effective, efficient, and profitable electronic commerce block the way. But as the world's second largest Internet market grows up, we could be witness to an EC blossom in Japan. One caveat: expect the unexpected.
by Jeremy Epstein The case has been made many times that the driving force for electronic commerce around the world is not in the Business-to-Consumer arena (B to C) but rather in the Business-to-Business arena (B to B). As large-scale organizations begin to realize the cost and efficiency benefits of implementing cutting-edge information technologies, they will increase investment in this area. However, as David Kellar of AMI pointed out in the April 1998 issue of Computing Japan, only Japan among all of the Asian nations will have negative growth in IT and Internet-related spending in 1998. The exacerbation of the economic picture -- increased layoffs, competition on prices from SE Asian competitors with tremendously devalued currencies -- is expected to put a squeeze on profits and will shift focus from future investment to current survival. Mike Antonelli, Director of Marketing for IBM's Asia Pacific Headquarters e-Business, says that the realization for the need to implement new IT systems "has to happen with line-of-business executives and senior management who understand that there is a new world out there and their business has dynamics, pressures and objectives that shape the direction they want and need to go." Whether the upper echelon of Japanese firms realize this or not is a subject for debate. The relatively slow paced adoption of EC technologies in the B to B sector does not necessarily imply that the B to C picture is entirely bleak. Quite the contrary, there will be growth, just not an explosion, at least not yet. Consumers, who will feel the greater pinch on their pocketbooks of a deepening recession, should turn to the Internet to realize the cost advantages of dealing direct with manufacturers. The question is, which manufacturers? With the shakeups that began in April, more and more foreign firms will enter Japan and seek a piece of the action. Companies like Amazon.com are making moves towards entering the Japanese market, and will leverage their extensive experiences in the US to gain an advantage over Japanese retailers. Can Kinokuniya online compete with Amazon? Certainly not on price. The experience and cost advantage that foreign, primarily American, Internet-retailing firms can summon will enable them to quickly leapfrog over the Japanese retailers. It has long been said that the world of EC is a borderless one, and now, with Japanese consumers having the world at their fingertips, this will undoubtedly be true for them as well. One key to successful B to C electronic commerce, however, is the ability to comparison shop. This requires time spent online, something Japanese do not have the luxury of when compared to their American counterparts. The reason is simple: the cost of online time. According to Bunichiro Fuji of Sony Communication Network K.K. "NTT is a huge obstacle" to the development of EC in Japan. ISPs around Japan know full well that at 11:00 pm, when the rates go down, "there is a huge spike of activityÉ which lasts until 1:30 or so," according to Chris Phelan of GOL. "NTT's rates cause [the] dramatic spike at 11:00, no question about it." Obviously the barrier that Bill Gates recognizes as the biggest in the US is also evident in Japan. Bandwidth, even though ISDN lines are used in 21.2% of Japanese homes, is a major issue. Most Japanese still access the Net over 28.8 kbps modems and a normal Web page takes about 45 seconds to download at that speed. Certainly not the most conducive atmosphere for online shopping. This is yet an additional barrier which, compounded with the prohibitive rates of NTT, stand in the way of EC's growth in Japan. What is pushing the B to C market in the US? Finance, namely banks and stocks, travel, and sales of retail items such as books, music, and computers. In the long term, these areas "will show the strongest growth over the next few years in terms of actual yen volume transacted," according to Tim Clark in the Japan Internet Report, No. 24 (March 1998). He is probably right, yet in the short term, each of these areas will need to markedly improve their selection, ease of use, and most importantly, become commonplace among PC users. In the area of personal finance, the US once again serves as a model. In the mid-1970s the deregulation of the stock brokerage business enabled and encouraged individuals across a wider spectrum of social class to become more sophisticated investors. People started managing their own money and discount brokerage accounts mushroomed throughout the 1980s. The jump from telephone trading to PC-based Internet trading was not a difficult one to make. Japanese consumers, however, never experienced the intermediate step of discount brokers and furthermore, most Japanese have little experience as active investors in the stock market. Many foreign firms, like Fidelity and Merrill Lynch, seek the opportunity to get a piece of the dormant ´9.2 trillion in postal savings, but pushing consumers online immediately seems unlikely. Though Daiwa Securities states that "the combined total of online accounts at all its branch offices is growing at a rate of 6,000 per month, most of the new subscribers are individual investors in their 30s investing relatively small sums." This means that the commissions generated from trading will not nearly be enough to drive this area of B to C commerce. Certainly the lifting of restrictions on foreign currency accounts could help push this along; the question is simply, how much? As for banking, PC banking was introduced in the US in the 1980s. With programs like Manage Your Money and Quicken and proprietary systems of certain banks in the US, home owners adjusted to paying their bills online. In Japan, a dearth of personal finance software and a lack of PC banking experience makes the transition from full-service tellers or ATMs to Internet online banking a more dramatic one. Another barrier are the banks themselves. Anyone with a Japanese bank account knows that 24-hour access to cash is but a pipe dream and this lack of technological know-how and service poses additional obstacles. Yes, improvements are being made, but gradually. Sumitomo offers full online banking service and Tokyo-Mitsubishi, Fuji, Asahi, and Tokai banks offer some limited services or are in testing periods. They will eventually go online. They will have to, but the time involved in establishing a full-blown Internet online banking service means that 1998 is not the year of the online bank in Japan. Further, over 60% of all purchases of a single item online are for less than \10,000. This is nowhere near enough for the big ticket items like computers, which have made Dell #1 online with sales of $3 million per day or Apple, with $500,000 per day, to drive Japanese B to C commerce figures in Japan. Jerry Yang, the founder of the search engine, Yahoo!, speculated that the huge growth projected for Internet commerce this year will be predominantly fueled by women. Estimates vary, but the numbers of women online in Japan range from 10% on the low-end to 30% on the high-end. This stands in stark contrast to the US, where close to half of Internet users are women. Japan is the world's second largest market with 8.5 million users, but the consensus among Japan's Internet industry watchers is that it lags behind the US anywhere from 12 to 18 months. Neither B to C nor B to B commerce will take off in the US this year, next year or the year thereafter. EC in Japan will certainly not take off in Japan this year either. When it is finally established, I expect three different models of Japanese EC to emerge. The first will be a globalized B to B model, where globally savvy and sophisticated firms will adapt to the demands placed on them by international competition. Their suppliers and dealers will have no choice but to adapt. The second will be localized versions of international Internet retailing firms with extensive experience like Amazon.com, Dell or Apple (if and when the economy picks up), which are able to thwart Japanese competitors and sell directly to consumers. The final group will be a national model: Japanese firms that cater to a niche within the Japanese market, such as firms that sell ramen from Hokkaido (http://www.comco.ne.jp/gpt/kouri.html) or other specialty items. Yes, Japan is picking up speed, and yes, it may arrive at the EC boom at the same time as the US. However, with a deteriorating economic forecast, inherent domestic barriers such as NTT, in fighting between MITI and MPT over who has ultimate control over the nascent EC industry, and a still inexperienced user base, EC has some way to go before establishing itself firmly within the Japanese economic landscape.
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