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eBJ: Why did you start the Japan Small Company Investment conference? Rabin: Over the past few years there has been a lot of attention paid to the economic, regulatory and technological changes that are beginning to reshape Japan's business environment -- trends that promise to accelerate in coming years. This is creating many interesting opportunities both in the export-oriented industries that Japan is renowned for as well as those with a domestic focus. While many foreign investors are coming to understand the potential, they remain largely unaware of the specific companies benefiting from this transformation and how to pursue these opportunities. At the same time, Japanese firms are finding they can no longer rely upon commercial bank loans as their primary source of capital. This creates a greater need for private equity, M&A and other financial engineering techniques, yet most Japanese firms lack the experience and resources needed to attract and effectively deal with foreign investors. To facilitate interactions, transactions and relationships between Japanese firms and foreign investors, we developed a conference and support structure to satisfy this demand. eBJ: Economically speaking, what positive developments do you see in Japan recently? Rabin: Whereas the U.S. has been actively engaging in deregulation and restructuring and reorganization for two decades, Japan has all or most of its gains before it. While it may be early to allocate capital to the macro indices, there are many micro opportunities emerging. In many cases, it is the problems themselves that are leading to the opportunities. eBJ: Can you give an example? Rabin: For example, pessimism about the future has resulted in a delay in marriage and birth rates in Japan. This has troubling implications over the long term, yet it has led to a rapid rise in disposable income among Japanese singles, many who still live at home and young couples, who fit the DINK (Double Income, No Kids) profile desired by so many purveyors of upscale products. eBJ: Any other demographic trends that are important? Rabin: Japan's aging population is also giving rise to amazing opportunities in medical equipment and technologies and geriatric care. Women are also taking on an increasingly important role in the workplace. eBJ: What is your take on the state of IT in Japan? Rabin: Japan was late to embrace the tech boom that engulfed the U.S. in the late 90s. It just started to take off when the U.S. tech bubble burst about two years ago. The introduction of low-cost ADSL access is leading to high growth in broadband penetration and time spent online. The demand for web services, e-commerce and other technologies and applications is accelerating at a time when they are maturing in the U.S. There are also opportunities to replicate business models and to employ restructuring techniques that have proven successful in the U.S. They can be used to achieve greater economies of scale, profitability and additional revenue sources in Japan, where a ready market of high-income consumers awaits them. Japan also produces many attractive technologies, applications and products. Wireless is one area where Japan remains far ahead of the U.S. and we are only just beginning to enter into the age of convergence and birth of Internet appliances. eBJ: What kind of help do smaller firms need in pursuing investment opportunities in Japan? Rabin: Cross-border deals can be complex and costly, both in terms of managing the due diligence, time and other issues and commitments that are part of the transaction process -- not to mention the ongoing communication and interaction that is part of any successful investment. This is especially problematic as smaller firms and investors are often not as sophisticated as larger companies and financial institutions and therefore need more hand-holding and support. The costs are often difficult to amortize within small- to mid-sized transactions, preventing both interested firms and investors from gaining the preparation, counsel and follow-up needed to achieve successful results. eBJ: How did the Japan Small Company Investment Conference address these issues? Rabin: We utilized a portfolio approach for our investment conference. It provided a cost-efficient vehicle that facilitated the initial preparation, screening and introductions needed to establish priorities and a more rational allocation of resources to deliver necessary follow-up. Within this mix we were able to showcase two exciting specialty retailers, one that focused on natural foods and another on gardening products. We also featured three firms with specialized software applications oriented toward improving procurement systems, factory automation, graphics technology and document management as well as three others that focused on the semiconductor industry. Through this cross-marketing and promotional effort we were able to gain synergies and an economy of scale that would not have been otherwise possible. It allowed us to attract over 200 investors and other targeted individuals as well thousands of visitors to the site (http://kwrintl.com/jsciconference) that was developed. We continue to receive numerous ongoing inquiries about this event and our plans for the future. eBJ: Is Japan moving towards a U.S. –style economic model? Rabin: It is moving in that direction. Japanese firms have traditionally focused more on market share, operational efficiency and product development than profitability and the more intangible financial, marketing and other concerns that tend to preoccupy U.S. managers. Additionally, bank lending tended to be made more on relationships and collateral than the credit- and risk-based approaches used by U.S. financial institutions. As Japan moves away from a main-bank and lifetime employment system to one that is more focused on equity investment and merit-based performance it will inevitably require a shift toward a U.S.-style model. eBJ: How can Japanese firms benefit from investment by foreign firms in this new environment? Rabin: Foreign investors can help Japanese firms to better understand and adopt these practices and to build stronger, more competitive companies that are able to adapt to the new environment. They are also not subject to the same cultural and social constraints as Japanese managers. The point here is that this is not rocket science. Many Japanese firms are fundamentally sound but have never had to employ the controls and systems that are used to manage and evaluate U.S. and many European firms. eBJ: Could you give an example of this? Rabin: Nissan is one high-profile example. By employing relatively standard corporate reorganization techniques Carlos Ghosn was able to restore the company to profitability. Wilbur Ross and his team at Kansai Sawayaka Bank have also made significant progress, working to introduce a credit- and merit-based culture as well as a wider array of financial services and products. This has helped to significantly expand its loan portfolio and raise profitability in a troubled banking environment. eBJ: Do you feel Japan has done enough to make it easier for foreign firms to make investments in Japan? Rabin: While it is not a linear path, Japan is certainly doing more than ever before to make it easier for foreign investors to enter the Japanese market. Much more needs to be done but in my eyes the major obstacles today are more on the cultural and personal than the regulatory level, where most barriers can now be addressed with the help of experienced legal counsel and other support. Part of the problem is that while Japan remains the world's second largest economy, with a well-educated and affluent consumer and industrial base that is increasingly receptive to new ways of doing business, Americans do not sense the opportunity and potential. eBJ: And why is that? Rabin: They tend to focus on other markets that are growing at a more rapid rate -- but which are not even forecast to possess the same underlying stability or market characteristics as Japan for many decades. For example, per capita income in China ranged from $2,253 (rural) to $6,280 (urban) in 2000 compared to over $34,000 in Japan. If you are a U.S. company seeking a market for your goods or services which offers the better option? This is not to suggest, however, that this is simply a case of neglect by U.S. firms and investors. Even when there is interest, investors have a hard time obtaining the specific information and contacts they need to make rational investment decisions. For an economy as large as Japan it maintains a remarkably low profile in the U.S., and Japanese firms need to do much more to reach out to American executives or investors to both raise their interest and to make it easier for them to identify and access investment opportunities that meet their interest and requirements. eBJ: What are the main changes in Japan’s business environment that potential investors would like to know? Rabin: Since the adoption of Japan's "Action Plan for Economic and Structural Reform" in 1997 there has been a steady movement toward deregulation and reform in the Japanese economy. The most recent achievements include revisions to Japan's commercial code to allow adoption of a U.S.-style corporate governance system, new mark to market accounting standards and measures to enhance labor flexibility and pension portability. Many other measures have been adopted in recent years. To enhance corporate competitiveness and flexibility, steps have been taken to end the prohibition on holding companies, facilitate corporate divestitures without negative tax consequences and to revise the civil rehabilitation law to simplify restructuring and bankruptcy. To promote the development of small and medium enterprises and start-ups, steps have been taken to allow the use of stock options in compensation packages, create a Limited Partnership Act to facilitate the use of venture funding and establish technology licensing organizations to encourage the transfer of university research to the private sector. Many other steps have been taken to promote the use of information technology and e-services, to enhance labor flexibility and to reduce the high cost of doing business in Japan. While one can argue over the pace of progress and the need for more rapid reform, it is also important to recognize the tremendous shift of sentiment within Japanese businesses and consumers. There is far more openness than ever before to the entry of foreign firms and investors. Only ten or even five years ago, Japan remained eager to go it alone. They are now keenly aware of the need for change if they are to maintain and expand their economic viability. eBJ: And What are the key issues to keep in mind when attempting to enter into investment transactions with Japanese firms? Rabin: Americans and other foreign investors need to keep in mind that Japan is not the U.S. While that is part of the attraction and many of the obstacles that were faced in the past are now being addressed, it requires numerous adjustments to allow for cultural, social, legal and regulatory differences. This is not to suggest that U.S. firms need to sacrifice their normal profitability and other objectives when entering into Japan but rather that they must take time to understand the real differences and adjust their expectations so that they can adopt a sustainable plan of action, investment model and time frame that will allow them to achieve the results they are looking for. Support by experienced service professionals and other people who know the environment is usually advised. eBJ: Do you have plans to organize additional investment conferences in the future? Rabin: Based upon our first success we are now in the midst of talking with many companies, investment promotion agencies and intermediaries such as venture capital and investment management firms, investment banks, service firms and securities exchanges who are seeking to showcase clients or portfolio companies. Interestingly, these inquiries are coming not only from Japan -- but all over the world. We are now in the midst of planning and hope to organize an expanded initiative of this kind early next year. If any of your readers have an interest or would like additional information, please have them contact our offices at kwrintl@kwrintl.com . The preceeding information is provided by: KWR
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