TT-958 -- Mercari's Problems in America, e-biz News From Japan

* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term
technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

General Edition Sunday, Aug 26, 2018, Issue No. 958

- What's New -- Mercari's Problems in America
- News -- Discussions to control plastic waste
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- 10,000 dancers in Koenji, Crater hiking in Hokkaido
- News Credits

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+++ WHAT'S NEW - Mercari's Problems in America

One of the most hyped Initial Public Offerings (IPO) this year was in
June, when Japan's first "unicorn" start-up, flea market trading site
Mercari, listed. The company blew past its opening price and by the end
of the first day was worth around JPY600bn, or JPY5,300/share. But now
in August, oh what a difference two months make. Senior management had
to make an ignominious announcement that for the first time in several
years the company had lost JPY7bn for the year ending June 31st, 2018.
The reason, according to Mercari, was mostly due to "investments" being
made in the firm's business in the USA.

Mercari is for sure on the right track generally. In the last 12 months
sales have soared, up JPY35.7bn, or 62%, thanks to continued rapid
growth in Japan, and locally the number of monthly users has jumped
another 20% to an incredible 10.75m a month. That's almost 10% of
Japan's population! But despite these stellar numbers, the bad news
emerging from the USA is sufficiently scarey that the company's stock
price has been pummeled, and what used to be JPY5,300/share is now
reversed and the closing price on Friday was JPY3,500/share. There are a
ton of foreign shareholders in Mercari, so they are no doubt worried
about how things are going.

So what is wrong at Mercari? In a word - "USA-itis" (an obsession with
the US market).

Like many Japanese fast-rising internet companies before them, the
Mercari senior management have a "bug up their butts" about taking on
the e-commerce sector in the USA. Why this market is so important to
them at this early stage, versus Asia, is not exactly clear, but we'd
warrant that it has something to do with the fact that their Series B &
C investors are local funds that are obsessed with backing a unicorn (a
US$1bn valuation extrapolated from the last funding round), and those
VCs have something to prove to their competitors in the US.

Mercari is their way of saying that Japan has arrived - in other words,
ego, pure and simple. And to be a unicorn in Japan, you not only need to
look and act like an aggressive US company, you need to be ready to
expand at the same breakneck speed throughout the world. No one from
Japan has done it before, and at this rate neither will Mercari.

[Article continues below...]

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[...Article continues]

Mercari actually entered the US market in 2014, so they are not exactly
beginners there. Furthermore, they have hired some heavy hitting
managers, such as Jon Lagerling formerly of Facebook and prior to that
Google. But it's clear that whatever has led the company to greatness in
Japan has simply not been translated to the US market.

In Japan, the Mercari app has been downloaded over 100m times, meaning
about 10% of all downloaders are active monthly - which is amazing. This
means that buying and selling second-hand goods as a means of personal
inventory control has gone mainstream. Don't like those shoes any more?
Sell them tonight and buy a replacement pair in time for the party next
weekend. Want baseball tickets for your kids? Sell the surfboard under
the bed, that hasn't been used in years.

In the USA, the app had (as of March) been downloaded 37m times, and yet
the gross merchandise volume (GMV) was only JPY6bn, less than 8% of what
it is in Japan. Is this a cultural difference, which dooms the company
to mediocrity in all foreign markets, and which in that case will most
certainly demolish the stock price forever, or is it an execution
failure, in which case Mr. Lagerling should probably be told by the
Japanese senior management to go look for another job?

This ego-driven desire to take on the US market by Japanese start-ups is
of course nothing new, and the path is littered by Japanese companies
laid low by their misunderstanding of what drives US consumers, the
inability to adapt management styles, and the lack of oversight of local
senior management. Language plays a big part of this, as does the
remarkable difference in corporate cultures - Japan being regimented,
incremental, and detail-obsessed, while the USA is performance and
personality-oriented and looks for the big leaps forward.

A good case in point among other Japanese listed internet companies is
Rakuten. We could write a tome on what is wrong with Rakuten's business
model, especially in the USA. The CEO, Hiroshi Mikitani, is a visionary
who does a great job of directing his company strategically, but the
execution of those visions is left to an army of button soldiers who
can't and won't think outside their personal box. And with Mikitani's US
acquisitions, each one a huge cost to Rakuten, they have been almost to
a company, a failure.

Here are the main acquisitions:

* Buy.com for US$250m - absorbed into Rakuten, but from the 2017 Q4
financials, we can see that the international e-Commerce business is
minuscule and falling.
* Kobo.com for US$315m - this ebooks business in Canada is limping along
to the extent that Rakuten had to do a co-selling deal with Walmart
(which has its own problems with Seiyu in Japan) to put fresh lipstick
on it - basically an admission that the current business model is doomed.
* Viber for US$900m - this free calls company has fallen to number four
in the apps market and their income from core telco revenue fell
(despite the graph in the annual report trying to make it look bigger).
* eBates for US$1bn - this is rakuten's biggest acquisition, and to be
fair, they may actually do something with this business. But even though
income rose 44% last year, on its current trajectory it will take
Rakuten 15+ years to pay for the acquisition cost.

In other words, Rakuten has almost nothing to show for US$2.5bn of
acquisitions in the last 7 years, and what's left behind is so
embarrassing that the company in its annual report has omitted the
actual numbers for each business - preferring instead to make out that
the companies are thriving. Again, we see ego getting in the way of
commonsense.

Going back to Mercari, there are few places to go for specifics about
what challenges the company is facing and how they plan to fix them. As
we can see from Rakuten, when things don't go well overseas, the company
simply leaves the data off the Annual Reports, or worse still, covers it
up to try and make things look better. So one of the few reliable places
to find insider information on the US branches of Japanese firms is the
employee complaints site, Glassdoor.com. And looking up Mercari on
Glassdoor is quite eye-opening.

Now on Glassdoor, you need to understand how to read the comment
threads. Usually there will be some short highly favorable comments,
which usually come from employees who have been pressed by senior
management to make positive comments to help recruiting. You can easily
pick these out because the writers are scared to write any meaningful
negative comments under the "cons" section. Then you have your misfits,
who blame the greedy management for everything, and you need to overlook
these as well. The comments you want to pay attention to are those where
the writer reluctantly criticizes the firm, showing that they wish
things could have been different. In particular, these posts will list
things management should fix. AND, if you have a series of these types
of posts, you can be reasonably sure that there is a problem there.

Mercari has many such posts. Here is one of the best ones:

**************
I worked at Mercari full-time (More than a year)

Pros

The people in the Portland office were amazing. Though managers were
inexperienced, it was clear when they would lose a large chunk of drive
whenever they would report back to the distant powers that be in San
Francisco. Though they had some employees they basically just scooped
off the street, the vast majority could have made this company great if
they were actually given the tools to succeed. It's a real shame.

Cons

Essentially the CEO is in over his head. The CEO before him, though
nice, was also in over his head. The current CEO has no idea how to talk
to people that do not work directly in front of him. He goes with the
"hands-off" approach which may have worked at Facebook and Google, but
this company is not either of those. You have to put in the leg work
before your employees respect you. Your resume is very impressive, but
if you're a jerk, the respect from your employees can be flushed in
literally a 30-minute meeting.

To the overlords in San Francisco, the Portland office was clearly more
of a bother to them. A bad idea they are now stuck with until they can
come up with a smart way to close it without looking like the bad guy.
To future employees. If you want to feel like you're just a number that
can never seem to produce enough solved tickets, welcome to Mercari. You
will feel right at home.

Advice to Management

If you have to give people bad news, just give it to them. Dragging
things out only makes it worse. If you truly do care to make that
Portland office work, you will have to fix a lot of bridges you've
already burned. The number of employees who have already gone in and out
of that place in the first year and a half should be a clear indication,
something is wrong. It's not the pay. It's not the food or perks you
provide. It's the feeling of walking into work every day knowing you're
just a number and the CEO at the top with the fancy background couldn't
care less about you and your entire team.

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

What we can see from this one post is Japanese management of US branches
personified:
* Lacking the right internal staff in Japan, Mercari goes out and hires
someone with an outstanding resume. Because of language and culture,
they are in no position to judge if he is really the right fit or not.
* Sounds like they hired Mr. Lagerling after the previous guy didn't
work out, so at least they are aware of the problem and this puts them
ahead of Rakuten in management skills.
* The Japanese way is to take time and absorb the good with the bad,
rather than to cut. The US way is to cut. Clearly this US employee
doesn't understand that, and wonders why the Portland office is allowed
to atrophy. We predict that once things get SO bad for Mercari with its
US office, then they will take action.
* Japanese firms either abdicate their foreign operations responsibility
to a foreigner, and cross their fingers they got the right one
(Softbank, and in this case Mercari), or they send over Japanese senior
managers who struggle to integrate with and motivate the local workforce
(Rakuten and hundreds of other JP firms). There are some pretty
interesting ex-employee comments about Rakuten on Glassdoor. Our
observation is that Japanese-style top management in the USA really only
seems to work in a manufacturing environment, where the general workers
are used to doing what they are told.

http://bit.ly/2MzbsE5 [Rakuten comments on Glassdoor. You need to
register to see all comments.]

Our advice to Mercari is to get out of the US market and cut your
losses. Instead do what LINE did and focus on the Asian market next.
Japanese management practices are generally better accepted in Asia, and
the consumer base already likes to follow fashions from Japan, so
creating localized products that work as you expect is so much easier to do.

...The information janitors/

***------------------------****-------------------------***

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-----------------------------------------------------------

+++ NEWS

- Elderly fraud continues apace
- FSA reassures cryptocurrency exchanges
- More flooding ahead for Japan
- Government to press for cheaper mobile rates
- Discussions to control plastic waste

=> Elderly fraud continues apace

It amazes us that a young Japanese conman can call an 80-year old and
pretend to be their son and convince the elderly person to send money to
an unknown bank account. But nonetheless, that practice is still going
on. Now, according to the National Police Agency (NPA), one operation
based in China was making JPY60m A MONTH with the phone scams! In this
latest case the scam was a bit more evolved, in that the scammers posed
as the police and the banking association, and who were able to acquire
the elderly targets credit cards. This latest expose came courtesy of
one of the Japanese phone workers at the Chinese firm, who felt he might
be killed by the gang. (Source: TT commentary from mainichi.jp, Aug 25,
2018)

http://bit.ly/2Lr6jZ3

=> FSA reassures cryptocurrency exchanges

Japan is treading a risky but very innovative path with its adoption of
crypto currencies, and is taking great pains to reassure the industry
that they will be allowed to operate without too much regulation. The
head of the FSA made surprising remarks in a Reuters interview last week
saying, "We have no intention to curb [the cryptocurrency industry]
excessively. We would like to see it grow under appropriate regulation."
***Ed: Having lost most of the Asian region's bankers and financial
sector business to Hong Kong and Singapore, where taxes are far lower,
the Japanese government has obviously decided that cryptocurrencies is
one way to restore business here. We don't think they have really
thought this through properly, but nonetheless, if they get it right,
Japan could become the global center for crypto.** (Source: TT
commentary from coindesk.com, Aug 23, 2018)

http://bit.ly/2PaaXgC

=> More flooding ahead for Japan

A senior meteorologist, Alex Sosnowski, from AccuWeather.com has
predicted that because of a strengthened El Nino weather pattern, Japan
will face more flood threats from extreme weather events, while central
asia (Ukraine to Kazakhstan) will suffer drought conditions. Sosnowski
says that El Nino is a warm phase for water temperatures in the tropics
of the Pacific Ocean, and this pushes the jet stream northwards, which
will cause more typhoons to curve north to Japan as well. ***Ed: The
company is predicting is projecting 27 tropical storms, 16 typhoons, and
6 super typhoons until the end of the year.** (Source: TT commentary
from accuweather.com, Aug 24, 2018)

http://bit.ly/2BQgOWq

=> Government to press for cheaper mobile rates

One thing you gotta like about Japan is the government's concern with
keeping "utilities" prices affordable to the general population. In this
case the utility is cell phones, and the government has said that they
believe the Big 3 operators (DoCoMo, KDDI, and Softbank) can afford to
cut phone bills by up to 40%. While the government can't directly
control telco prices, they can coerce the operators into cooperating
through tighter regulations. As a result of the comment, there was an
immediate stock market sell-off of the said operators, who between them
lost JPY1trn in share value. ***Ed: Why is the government pushing for
lower rates? Mostly because they want to off-set some of the pain of the
consumption tax increase next year. The tax is supposed to rise from 8%
to 10%, having been postponed several years ago when the LDP feared the
economy tanking again like it did after the last rise.** (Source: TT
commentary from japantimes.co.jp, Aug 21, 2018)

http://bit.ly/2NiZf2x

=> Discussions to control plastic waste

Finally Japan is starting to move with world trends towards the control
of plastic trash and marine pollution. The government has set up a
subcommittee of the Central Environment Council which will create a
draft strategy and numerical goals for plastics usage. Top of the list
is likely to be a ban in the sales and use of plastic shopping bags, a
ban on microbeads, better recovery and recycling of plastics, and the
increased use of biodegradable plastics. The OECD reckons that about 4m
to 12m tons of plastic garbage entered the oceans in 2010. ***Ed:
Actually there are laws already about the use of microbeads and other
plastics in consumer products, but they don't come with penalties...
Another wasted effort.** (Source: TT commentary from mainichi.jp, Aug
17, 2018)

http://bit.ly/2wtJFtw

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

***------------------------****-------------------------***

+++ UPCOMING EVENTS

No upcoming events this week.

***------------------------****-------------------------***

+++ CORRECTIONS/FEEDBACK

No feedback or corrections this issue.

***------------------------****-------------------------***

+++ TRAVEL DESTINATIONS PICKS

=> Koenji Awa Odori
Dancing madness in the streets of Tokyo

The Koenji Awa Odori Festival is one of Tokyo's largest summer festivals
and takes place during the last weekend of August. This year Koenji
celebrated its 60th festival, and what a celebration it was!

Every year, the event starts at 5pm and finishes at 8pm. The dancers
roam the streets of Koenji and there are several spots where you can
take a close-up look at the beautiful costumes and dance moves. About
10,000 dancers and musicians come together and show their performances
in front of nearly 1 million people. You can hear shimasen, drums,
flutes, and cymbals creating a unique rhythm, as well as dancers of all
ages and genders dancing along. The atmosphere is absolutely amazing,
everybody is having the best time of their lives. Of course you can grab
something delicious to eat and to drink and just watch the beautiful
performances.

http://bit.ly/2wgRxj7

=> Daisetsuzan Ohachi-Daira Crater
An amazing hike on the roof of Hokkaido

With 2,267 square kilometers of stunning mountains, it is the largest
national park of Japan. It boasts an incredible biodiversity, one of the
highest in the country. Nature shows her matchless beauty and some of
the wildest and roughest sceneries in Hokkaido. This and much more, is
the Daisetsuzan National Park.

Offering an extensive trail network, you can choose any difficulty level
and length for your hikes. One of the best options is to walk the long
loop around Ohachi-daira crater and then stay overnight at the Kurodake
Ishimuro Mountain Hut. Sleeping here will also give you the opportunity
to really enjoy your hike without having to rush to be back before dark.

Your starting point is in Sounkyo Onsen town where you can get the
ropeway up to the 7th station (1520m). From here the trail will get you
to the summit of Mount Kurodake (1984m) in about one hour. The view you
will have over the highland is amazing. The more you get close to the
top the more the silhouette of far mountains comes to sight on the
horizon. The hut is barely ten minutes away from the peak and it will be
your base for the longer loop trail.

http://bit.ly/2MXLjOm

***------------------------****-------------------------***

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+++ ABOUT US

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Written by: Terrie Lloyd (terrie.lloyd@japaninc.com)

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