TT-398 -- Outsourcing and JTP, ebiz news from Japan

Terrie's Take 398 -- Outsourcing and JTP, 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, November 5, 2006 Issue No. 398

+++ INDEX

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

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+++ WHAT'S NEW

On June 22nd a rather unique if small outsourcing company,
called Japan Third Party (JTP), listed on the JASDAQ.
Although at first glance the business looks like a pretty
standard operation, the company is special in that a full 95%
of its business comes from foreign technology firms (not end
users). The remaining 5% is with Japanese firms needing
some form of assistance leveraged by JTP's international
operations. In a country where most SI firms are challenged
to simply communicate with foreigners, JTP really shines.

According to MIC Research Institute Limited, the overall IT
outsourcing market in Japan for 2005 was worth about
JPY2.45trn (US$2bn), being split up roughly into the
following categories: Data Centers at 40%, contracted data
processing at 30%, and the remainder being in-house
manpower and general IT services and support. The market
has been stagnant since the implosion of the dotcom sector
in 2001, an event that had repercussions on data centers in
particular, and grew only 1.5% year-on-year to 2005.
However, thanks to the recent economic improvement, things
are looking up again, and MIC reckons that this year, 2006,
the overall market will be worth JPY2.61trn (US$2.21bn), up
6.5%. As one could expect, the biggest area of growth is
expected to be data centers, which are likely to expand by
about 8.7% annually through 2010.

The largest player in the conventional third party
outsourcing sector is IBM Japan. The company blew past its
competition, both local and foreign, back in 1999, when it
announced that it had signed a 10-year deal with auto maker
Mazda Motor Corp., for a reported JPY55bn (US$480m) for the
full period. The deal involved IBM Japan taking over the
development, operation and maintenance of Mazda's host
computers, supercomputers, 10,000 personal computers, and
most of its network links. While outsourcing deals had been
hitting the news on a regular basis before this one, the
Mazda contract was sufficiently massive and independent
that it served as a wake-up call to IBM's domestic SI
competitors, and touched off what has since become an
outsourcing war.

In the intervening 7 years since the Mazda deal, IBM's
competitors have been retaliating and putting together
their own deals. Among these was a landmark JPY250bn
(US$2.12bn) 10-year deal between Hitachi and UFJ Bank in
2002. The two companies in typical Japanese style formed a
joint venture - an indication of how closely Japanese firms
want to keep their outsourcing partners -- and which is
called UFJ-Hitachi systems.

Ironically, with the merger of UFJ into the Bank of Tokyo
Mitsubishi at the beginning of this year, the final
outsourcing victor over the next two years will actually be
IBM Japan, who in 2003 formed an outsourcing joint venture
with Bank of Tokyo-Mitsubishi. IBM is doing really well in
the sector and is now rumored to be tying up with Resona to
supply a core banking system to Japan Post, the world's
largest savings bank.

[Continued below...]

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[...Article continues]

Back to JTP, the company was started in 1987 by CEO Kazuaki
Mori. He got into the outsourcing business, so the story
goes, after attending a Rotarian conference in Austin,
Texas in 1982. Mori worked in the Field Service division of
Omron, and was trying to learn more about how to support
Omron's ATM business in the USA. As one of the few
non-Americans in the room, he quickly struck up a
conversation with the gentleman sitting next to him and
mentioned how he was struggling with how to support his
ATM business. The man asked him why Omron, an ATM maker,
was trying to be a field service company. "Surely," he
said, "You would want someone with an already established
third party service network to do the work?"

Mori was astonished. The solution seemed too easy,
especially when compared to the millions of dollars being
proposed internally for a purpose-built service network.
The concept and the term "Third Party" stuck with Mori, and
he decided to go check out several such vendors. He was
impressed with their professional capabilities and yet
their ability to control costs. Heading back to Japan, he
floated the idea that Omron, too, should go into the third
party maintenance business in Japan. The idea met with
favor and a team was formed.

However, neither Mori nor Omron had counted on the
revaluation of the Japanese yen in the mid-1980's and the
resulting loss of manufacturing competitiveness here in
Japan. Omron decided to get out of the outsourcing business
in 1987 and Mori, having decided that he had found his
calling, resigned to start up Japan Third Party.

Fast forward 19 years, and today Mori's company is doing
about JPY5.08bn (US$43.05m) in sales, with an operating
profit of JPY230m (US$1.949m). Modest numbers to be sure,
but given that the company is growing in an environment
where most of the world's majors have failed, shows that
its basic business proposition has legs. Right now most
of JTP's revenue comes from business-to-business (not
end-user customers yet unfortunately) dealings with foreign
firms already in Japan. It has a blue chip client
list, which includes such companies as Sun Microsystems
Japan, SAP, Symantec, Nokia, Acer, and Hewlett Packard
Japan.

Analysts say that while the company may be doing well, its
exposure with 40% of its business coming from just two
customers, Sun Micro and HP Japan, means that it needs
to expand and diversify. Indeed, that is exactly what
Mori's team is doing. JTP has been aggressively investing
in a regional presence in such countries as China, Korea,
and the USA -- taking advantage of its bilingual and
sometimes trilingual staff. In the USA in particular, Mori
reckons that about 500 venture capital deals are done in
Silicon Valley every year, and that about 10% of these
companies are interested in setting up in Japan. His
Santa Clara office is intended to tap in to this flow.

On the day of the IPO, JTP's stock closed at a pretty good
price of JPY360,000 per share, almost double the IPO price
of JPY200,000. But once the day traders had taken their
toll, the stock has settled down to around JPY190,000, and
now looks relatively cheap. One reason we think the stock
has come down is that the market doesn't really understand
the value of JTP's foreign client base. His clients are
multi-billion dollar companies with a commitment to Japan,
and Mori keeps finding ways for them to do business with
him. The latest is engineer training. JTP educated a
surprisingly large 12,000 engineers last year, and in
August 2006 inked deals with EMC, the storage maker, and
Caplan, the Itochu-related temporary staffing company, to
conduct training on the behalf of both companies.

There will be a full article on JTP in the December issue
of Japan Inc. magazine. We'll let readers know when it is
due out.

Wrapping up today's newsletter, and on a completely
different note, we'd like to point out the two CEO
positions featured in the Job Section below. These
positions are with companies that Japan Inc.'s advisory
consulting business is working with. The key point about
these vacancies is that both companies are looking for
Japanese-speaking foreigners to run their Japan
operations. It is refreshing to see foreign firms who value
local foreign top staff. Interested parties should contact
editors at terrie.com for more information.

...The information janitors/

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===========================================================

+++ NEWS

- New Indian software centre for Japan
- Oricon overwhelmed by iTunes
- Softbank subject of Fair Trade Complaint
- Income gap increasing, now 12th among OECD
- Condo developer ramping up property purchases

-> New Indian software centre for Japan

Although a slightly dated news item, we thought this fits
well with today's editorial about outsourcing. Tata
Consultancy Services (TCS) announced in October that it has
opened a new software development centre in Kolkata that
will supply services to about 35 Japanese Systems
Integrator and end-user customers. The new center will have
100 staff to begin with, expanding to several thousand over
the next 2 years. ***Ed: Considering all the other software
centers being formed in India by Japanese and Japan-related
companies, clearly there is something of a boom going on
right now. We have heard that one catalyst for the latest
burst of activity is the upsurge of Indian engineers
learning Japanese in their own country, especially now that
it is harder to get a work visa and jobs in the USA.**
(Source: TT commentary from reuters.com, Oct 18, 2006)

http://tinyurl.com/u5mh6

-> Oricon overwhelmed by iTunes

Oricon, Japan's largest publisher of music hit charts (kind
of like Billboard in the USA) has announced that it will
pull out of the online music business after sparse customer
traffic to its website, caused, it says, by the
overwhelming popularity of Apple's iTunes music store.
Significantly, an Oricon spokesman said, "The iPod has
outrun us all." Oricon will refocus its energies on mobile
phone music downloads, which is still a viable market.
(Source: TT commentary from silicon.com, Nov 1, 2006)

http://networks.silicon.com/webwatch/0,39024667,39163745,00.htm

-> Softbank subject of Fair Trade Complaint

KDDI has filed a complaint with the Fair Trade Commission
(FTC), claiming that Softbank Mobile has been running
misleading ads in local newspapers. At the center of the
controversy is a series of ads which claim zero fees for
calls and e-mails between Softbank Mobile users. But
on reading the small print there are a large number of
conditions that make it unlikely the average consumer will
be able to take advantage of the offer. The ads also offer
a "reduced" price to newly signed subscribers, over the
"regular" price of JPY9,600. KDDI claims that there has
never been a regular price at this rate, and that this is
just an effort by Softbank marketers to hype the apparently
low cost of the service. (Source: TT commentary from
nikkei.co.jp, Nov 3, 2006)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20061102D02JFF02.htm

-> Income gap increasing, now 12th among OECD

Whether you buy into the opposition parties' claims that
Koizumi's market deregulatory policies are the cause of
growing income disparity, the fact is that a government
survey done by the Ministry of Internal Affairs shows that
indeed the disparity gap not only exists, it is increasing.
Apparently, Japan's income disparity is now 12th among OECD
countries, about the same as France but greater than that
of Germany and Sweden, and lower than that for the UK and
USA. ***Ed: A separate July OECD report showed that Japan's
relativepoverty rate, that is the number of people earning
less than half the national median income, is the second
worst in the OECD, after that of the USA.** (Source: TT
commentary from nikkei.co.jp, Nov 2, 2006)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20061102D02JFN02.htm

-> Condo developer ramping up property purchases

In anticipation of a strong increase in property values in
urban areas of Japan, Japan's largest property developer,
Mitsui Fudosan, has said that it is increasing investments
into special-purpose companies (SPCs) as well as purchasing
property for condominium development. The new strategy was
announced as a follow-up to the company's half-yearly
results last week, when it disclosed that group operating
profit soared 42% to JPY64.2bn (US$525m) for the first half
of FY2006. The surge in profits came from property
investment and the sales of condos. (Source: TT commentary
from nikkei.co.jp, Nov 1, 2006)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20061101D3ZJKN07.htm

NOTE: Broken links
Many online news sources are now removing their articles
after just a few days of posting them, thus breaking our
links -- we apologize for the inconvenience.

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Japan is home to the highest density of vending machines in
the world, with about 5.6m machines, or one for every 23
people. You can buy almost anything, and the Japanese do,
with about JPY6.67trn (US$56bn) being spent every year.

Yet, apart from the obvious players such as major soft
drinks companies, there have been no foreign owners of this
massive direct sales medium - until now.

Market Pioneer Japan is proud to announce that as of
October, 2006, it has built a network of 1,000 vending
machines placed nationwide, selling stickers and print
logos. We invite owners of licenceable characters to
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the Japanese market.

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===========================================================

+++ CANDIDATE ROUND UP/VACANCIES

=> Two Japan Inc. Communications advisory consulting
clients are actively searching for CEOs for Japan. These
positions are both open to non-Japanese with relevant prior
experience and language skills.

Position One:
- CEO for established Japan operation, electronics industry
- Local office of European multinational
- Managing 70+ employees
- Must have strong electronics/sales background
- Must have strong bilingual language skills
- At least 5 years recent work experience in Japan
- References will be required
- Position to be filled by year-end

Position Two:
- CEO for new operation to be established in 2007
- Green-field manufacturing facility, to grow to 40 people
in two years
- Parent company is one of fastest growing
technology/manufacturing companies in USA
- Radical new manufacturing process that in trial research
indicated company will revolutionize the market segment
- Strong leadership and bilingual communication skills
- Initial work is planning and executing the start-up
- Then moving to sales and market leadership
- At least 5 years in product manufacturing in Japan
- References will be required
- Position to be filled by March 2007

* Interested parties may make initial contact in confidence
to editors at terrie.com.

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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 at terrie.com.

-> TT 397. We highlighted the changes in the attitudes by
the courts as companies seek to adjust employee's salaries
according to performance rather than seniority. A recent
law allowed a Kanagawa company to signficantly reduce the
salaries of some seniors after they could not perform to
the specifications of their job description.

*** Reader response
This could trigger a wholesale gutting of the wage system
and make a lot of older workers vulnerable. Is that such a
good thing in a country whose income gap is already
getting growing?

*** We respond
What would you rather have? A flexible work force in a
competitive world, or drivers and gardeners on JPY12m or
more annually because they have been with the company for
40 years? We really do know of drivers who make this amount
and more. The reality is that Japan can't afford to build
its social welfare net into the companies themselves.
Instead, if people need help, it should be broken out into
a government-supplied line item. We believe skilled young
people should earn more, based on merit, and older people
getting left behind should try reskilling themselves, or
better still, go into business for themselves and hire a
bunch more talented young people...

...The information janitors/

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===========================================================

***********************************************************
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+++ ABOUT US

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