How the Internet Can Save

the Japanese Trading Company

- by Tom Spargo -

The Japanese economy continues to limp along, and thereÕs no sign that the recession will let up soon. Why? Some say itÕs due to the bad loans on the books of many Japanese banks and multinationals left over from the over exuberant investments in the 1980Õs. Others say itÕs due to a floundering domestic economy populated by cautious consumers unwilling to spend. Still others maintain the recession persists due to the general financial malaise in Asia. While these may all be true, there is a further important factor which should not be overlooked: Japan still does business with basically the same technology it has used for the last twenty years. While the us and europe are quickly deploying Internet technology to speed the pace of business, Japanese companies still rely heavily on faxes and phones. This is particularly true in the area of international trade where several large Japanese trading companies (JTCs) dominate. Trade is arguably JapanÕs most important industry, and the tremendous benefits to be gained by adoption of Internet technology would not only improve the efficiency of the JTC and ensure its survival in the information age, but would also go a long way towards stimulating the economy. The JTC is JapanÕs broker to the worldÕs buyers and suppliers. Each JTC has satellite offices around the globe through which it can negotiate and transact with foreign buyers and sellers. Its head office in Japan serves customers while acting as the hub of communication for its global network. As a country with scarce natural resources, Japan has had to rely heavily on the strength of its trade industry to achieve growth. To date, the JTC has worked well to bring value to Japan by achieving economies of scale in trade and by serving as the bilingual, bicultural Japanese face to the world. However, the JTC now faces a key issue from its constituents Ñ both domestic and foreign: does the JTC merit the commissions it receives from both buyers and sellers? Japanese companies are beginning to take notice of the way the Internet is bringing buyers and suppliers together at minimal cost through business to business electronic commerce. Without a perceived value proposition, JTC business will begin to decline and suffer from the disintermediation Ñ removal from the supply chain Ñ feared by many agents and brokers as global business is reshaped by the Internet. If you can't beat 'em, join 'em The JTC needs to embrace the Internet to avoid disintermediation. Countless brokers and agents in the United States have already learned the importance of developing their Internet capability. Discount stockbroker Charles Schwab (www.charleschwab.com) started an online stock trading company to be a part of the trend towards online retail trading. After sensing the direction of the market, Egghead (www.egghead.com) completely shut down its physical bricks and mortar presence to become an exclusively online retailer of computer hardware and software. Bookstore Barnes and Noble (www.barnesandnoble.com) started its Web operations after seeing the online success of its competitor Amazon.com. While the previous examples are primarily related to business-to-consumer sales, the basic fear that Internet technology can Òcut out the middlemanÓ is real. In the case of the JTC, the same process could potentially occur as Japanese customers seek to link directly to their foreign buyers and suppliers to save on both time and money. Avoiding disintermediation There are several ways a JTC can prevent disintermediation through the use of Internet technology. One way is to change the way business is conducted between buyers, sellers, the home office, and the satellite offices around the world. A typical JTC today relies heavily on the fax machine, phone, and express courier to query inventories, place orders, and file the necessary import/export paperwork. Allowing for time differences and the date of information on hand, ordering between Japan and a foreign country can be a lengthy and costly process. A JTC could save time and money by automating the entire process of importing and exporting with a net-based trading solution. Such a system would easily allow a foreign buyer to check the inventory and pricing of its supplier in Japan, place an order for the product online, receive confirmation of the order, and process the necessary customs and financial information. The pieces of such a solution are already available and in use in the marketplace. Hardware manufacturer Adaptec, for example, saved a reported $11 million in reduced inventory and other savings by using Internet messaging to electronically send purchase orders to its main supplier in Taiwan (see Internet World, February 1, 1999 - Ed.). A JTC could put an Internet-based trading solution together and market the service to its Japanese customers and foreign buyers and sellers. A JTC would be able to take advantage of the economies of scale in such a service and effectively preempt the threat of disintermediation by offering customers the time and cost savings associated with business-to-business electronic commerce. The Japanese economy would also be aided by increased competitiveness in global trade and cost savings associated with rationalization of the supply chain. Commodity auctions Another way that the JTC can use Internet technology is by creating a global online auction (a.k.a. virtual marketplace) for the commodity materials purchased in large quantities by Japanese manufacturers. TodayÕs JTC tends to broker deals on commodity materials with a limited number of Asian regional suppliers. This leads to inefficiencies in pricing as the Asian region best price isnÕt always the best global price. In a global online auction environment, foreign sellers from all over the world could respond to Japanese bids, thereby allowing the Japanese buyer to get the absolute best price from around the globe. Examples of such online global auctions already exist, provided from companies in the US. The Paper Exchange (www.paperexchange.com) allows paper mills and paper users in 40 countries to negotiate deals over the Internet and arrange for the shipping of products to anywhere in the world. E-steel (www.e-steel.com) will be opening this spring to allow buyers and sellers of steel products around the world to make deals with a 1% commission going to E-steel (see the LA Times, February 15, 1999 - Ed.). JTCs, as owners of the online auction system, would still own the transaction and receive a commission - but with a much better result for the Japanese buyer and, in the end, the Japanese consumer who will benefit from the price reductions. E-commerce A third way for a JTC to stay in the game and leverage the explosive growth of the net is by diversifying into business-to-consumer electronic commerce. While few companies have turned a profit in this area, analysts expect this market to grow in Japan and become a major channel for reaching consumers. According to the Electronic Commerce Promotion Council of Japan (ECOM), Internet commerce in Japan will be worth some ´15 trillion ($126.05B) three years from now - roughly 1% of all commercial transactions in Japan - and will rise to \63 trillion ($529.41B) by 2009. Furthermore, the Japanese government recognizes the importance of e-commerce to the Japanese economy. The recent USÐJapan statement on electronic commerce declared in principle that the government "should avoid imposing unnecessary regulations or restrictions" on electronic commerce. JapanÕs Ministry of International Trade and Industry (MITI) has also shown support by sponsoring several virtual shopping malls. (See CJ, October 1998, and this issue's Industry News.) One JTC which already understands the importance of diversifying into the business-to-consumer electronic commerce space is Mitsui, an investor - along with Nikkei - in AOL Japan. The recession in Japan has caused all Japanese companies, not just the JTC, to struggle with the need to change the way business will operate in the information age. The Internet is going to be the primary tool for that change and as an industry which stands to lose a great deal from the impending disintermediation, the JTC should feel an added incentive to take the lead in Japan in embracing the Internet. With the technology already available to create an Internet trading solution, global online auctions, and business to consumer e-commerce, the JTC should waste no time in getting started. For more on Japan e-business delivered right to your inbox, subscribe to Computing JapanÕs NewsNet e-mail newsletter at www.cjnn.com. For more on Japan e-business delivered right to your inbox, subscribe to Computing JapanÕs NewsNet e-mail newsletter at www.cjnn.com. Back to the table of contents