Traits and Improvements of Japan's Industries
Japan is facing new challenges from the dramatic changes in its industrial and social systems.
Therefore, Japanese companies need to break away from the concept of self-sufficiency in management resources in the form of human resources, technology, and money, and so-called closed organizational management such as grouping, comparison / change, and reform. In addition, Japanese companies need to urgently build creativity that will lead to inventions and business projects that will help solve social problems such as depopulation, meaning their increasing aging population.
To address these challenges, Japan is currently focusing on open innovation that integrates external organizations with foreign expertise.
The survey begins with a summary of Japan’s current industry situation. The graph above shows changes in Japan’s trade balance. Looking at products in the surplus sector, there are many products in fields related to the manufacturing industry, such as transportation equipment, general machinery, raw material products, electrical equipment, and chemical products. In particular, transportation equipment is a major industry in Japan. This accounts for half of the trade surplus. Toyota Motor Co., Ltd., Honda Motor Co., Ltd., and Nissan Motor Co., Ltd. are representative companies in this field.
It is said that the competitiveness of many Japanese industries, including the automobile industry, which is the main industry, was built against the backdrop of a “group” that has a pyramid-shaped supply chain structure at the top of producers. The “comparing and adjusting” mechanism in which companies cooperate from development to production are based on products of strong reconstruction.
However, the wave of change is currently plagued by a dynamic climate affecting these sectors.
Related examples include the growth of developing countries, the rise of emerging technologies such as AI. The shift of value sources from the manufacturing industry to the service industry represented by GAFA, the tightening of environmental regulations such as decarboxylation, and foreign progress and Government import restrictions.
In order to maintain and improve the competitiveness of Japanese companies, it is necessary to face changes in the industrial structure and competitive environment. It is necessary to create innovation and make further collaborative efforts to increase the pace of product production. However, if businesses actually continue to rely on their own business capital in the form of technology and human resources, as well as the conventional group business model and comparison and adjustment, this would be difficult to achieve.
Moreover, these waves of transition that Japan is experiencing are not only related to changes in the industrial system. Japan is also facing major changes in its social structure, including a slumping market due to a declining population, an inadequate working population, and social and cost issues associated with an aging population. As of 2020, Japan has a population of 125,320,000. According to forecasts, this will decrease to 110,920,000 by 2040 and to 92,840,000 by 2060. Furthermore, by 2020, the proportion of elderly people in the population will be 29.1%, which is expected to increase to 36.1% by 2040 and 38.1% by 2060.
Public open innovation funding
Now let’s look at the types of steps the Japanese government has taken to overcome these challenges.
The Japanese government has set policies such as “Society 5.0,” a vision for a human-oriented society that strikes a balance between economic growth and the solution of social issues through the sophisticated integration of cyber and physical spaces, as well as “DX (digital transformation)”. The creation of novel business in the light of these changes need to be improved in the industrial and social systems of the country.
Such projects are also closely related to the so-called Fourth Industrial Revolution. The Fourth Industry Revolution applies to the use of data such as IoT, big data, and AI in terms of technological progress. In particular, it is part of the efforts made during this transition period, such as the utilization of AI and robotics, the activation of the shared economy, and the growth of FinTech .
With this Fourth Industrial Revolution, we hope that Japan will become a pioneer in the world by integrating technological progress into all industries and social environments and tackling various social issues to realize Society 5.0. The meaning of the Fourth Industrial Revolution lies in the rapid creation and convergence of “real from digital” and “digital from real”, and it is said that the basis of added value is a model of data utilization. For this reason, new business models that have never been seen before are being developed.
“Companies are now prioritizing “ambidextrous management” under which they concurrently carry out both of the following: 1. The implementation of reforms in the company’s own core companies for data usage models; and 2. Full investments into new areas of industry (real stemming from digital, and digital stemming from real). In addition they are continuing to strengthen their core innovations through research and development and investment in facilities and equipment. The keys to future competitiveness are creative start-ups with the potential to quickly put things in motion along with open innovation.
The Government of Japan has developed a number of initiatives to help build a robust framework for the next step in the economy. However, in order to put in place direct incentives for open innovation aimed at creating and acquiring new added value, while at the same time growing pressure on companies to invest in growth. The Open Innovation Promotion Tax System is set to be developed from fiscal year 2020 as a means of encouraging Japanese companies with high internal reserves to make investments.
This tax system provides companies and corporate venture capital (hereafter, “CVC”) in Japan with a tax deduction of 25% on investments of 100 million yen or more (10 million yen or more in the case of SMEs) made to unlisted venture companies that have been formed for less than 10 years. To promote the supply of new capital to start-ups and torchbearers of innovation is to translate this into development. When investments amount to 500 million yen or more need to be made, overseas venture companies often apply for this tax scheme.
Open Innovation in Japanese Companies: Current Status, Characteristics and Trends
The changes in the economic and social structures mentioned above, along with the Fourth Industrial Revolution, have given impetus to the development of new business models. Open innovation projects have been successfully carried out in Japan in recent years.
As these statements demonstrate, among large Japanese companies, there are high expectations that they can accelerate the pace of innovation through collaboration that blends start-up ideas and innovations with the strengths of their real assets.
The case at which large and start-up businesses collaborate is because of the decision-making process. In order to make decisions at the forefront, many start-ups have a lot of authority and a CEO or someone in a similar position needs to make fast decisions. Large enterprises, on the other hand, also have staff at the department level. Before you can take action, you need to ask for permission from your manager. Multiple activities need to be prioritized at the same time which makes the decision time consuming.
In recent years, many attempts have been made to address these speed gaps in the decision-making process. Such as, separating the innovation team from the main business unit to establish a decision-making organization. As such, many companies are trying to solve this “decision-making pace” problem.
The current situation in Japan’s open innovation is concerning compared to the U.S. Japan does not have a long history of open innovation and there are still few precedents. There are several issues related to the framework of promoting open innovation at home and abroad and the pace of collaboration between large and emerging companies.
Open support systems for creativity are being introduced slowly but gradually at home and abroad. In the 2000s, entrepreneurs and investors were already working to build a start-up community in the United States. On the other hand, there are few Venture Capitals (‘VC’) in Japan at the moment, and there is not much investment in start-ups.
However, at present, CVC is being developed in Japan through industry-academia collaboration and collaboration with large companies, and has been involved in the Acceleration programs for English.
In addition, initiatives such as industry-academia collaboration, establishment of CVC, and development of innovation segments specializing in startup collaboration are underway. Cooperation among various stakeholders such as universities and financial institutions is an important aspect.
Currently Open innovation is gaining momentum in Japan through its technology ecosystem, features and patterns, but the pace of open innovation is still slow compared to Western companies.
In addition, the selection rate of entrepreneurs and start-up companies as partners also varies greatly.
There is no doubt that Japan has a long way to go compared to Western countries when it comes to an innovation ecosystem that frees up capital, technology, talent and expertise and facilitates collaboration among diverse stakeholders, prerequisites for inspiring startups and open innovation.
In May 2019, Startup Genome, which specializes in research on startup ecosystems, announced the research “Global Startup Ecosystem 2019”. This study ranks the maturity of startup ecosystems in cities around the world. Focuses on variables such as startup efficiency, financing, market research, networks, human capital, expertise and experience.
The survey includes a list of 30 startup cities around the world, with Silicon Valley occupying the first place. This ranking does not include Japanese cities.
However, in recent years, the tide has changed in Japan as well. For example, in this report Tokyo was mentioned for the first time for being in the Early-Globalization Phase. The stage at which Startup Genome states that global collaboration has begun in the startup ecosystem. TechBusinessCampTokyo is an initiative by the Tokyo Metropolitan Government and J-Startup, a program of the Ministry of Economy, Trade and Industry, that led to this evaluation in this survey. This shows that the development of the Japanese startup ecosystem is becoming more and more recognized in the global community. Two areas were particularly emphasized: Manufacturing & Robotics and Fintech.
The following section provides a brief summary of the key points that make these two areas particularly commendable.
Manufacturing and robotics, Japan is one of the world’s leading robotics producers, providing more than half the world’s supply. The Japan Robot Association, the world’s first robot industry association, was established in Tokyo in 1971 with companies such as DENSO Corporation, Hitachi, Ltd., Sony Corporation, Toshiba Corporation, Yamaha Motor Company Limited, Kawasaki Heavy Industries Ltd., and Mitsubishi Electric Corporation. ispace, inc., a company that uses microrobots to explore space resources. This company received as a Series A round startup $ 90 million funding.
Fintech, According to the Global Financial Center Ranking, Tokyo is ranked 5th in the world as a competitive financial center. The Tokyo Metropolitan Government was praised for its efforts, including the introduction of the “FinCity.Tokyo” concept and the launch of FinTech Business Camp Tokyo, a government accelerator program focused on FinTech.
In addition, funding for Japanese start-up companies is increasing year by year, and the environment for supporting start-up companies continues to expand.
In Japan, there were only two unicorn startups a year or two ago, but with the development of the startup ecosystem, it increased to seven in February 2020. In addition, five of these seven unicorn startups are in the area of Deep Tech (influential and innovative technology). It is recommended to pay more attention to these startups for the future of Japan’s deep tech sector.
As a result of the growth of the Japanese startup ecosystem, open innovation initiatives to foster partnerships between large Japanese companies and start-ups are becoming more diverse. Among them, overseas startups are also targeted.
For example, for acceleration projects, we have an Open Network Lab run by Digital Garage, which has a proven track record of supporting over 100 businesses. Including, KDDI MUGEN Lab operated by KDDI Corporation and PLUG and PLAY JAPAN, a Japanese version of Silicon Valley’s innovation platform that connects large companies and startups.
The number of other overseas support programs launched in Japan is gradually increasing, including the launch of Google for Startups Campus, Google’s US startup support facility in Shibuya, Tokyo; acceleration program for 500 Startups, an American seed investment fund; and the establishment of the Japanese subsidiary of the UK based Rainmaking Innovation LTD.
As for the innovation environment, there are many events such as WeWork, Fabbit, Venture Café, a Boston-based innovation promotion program, and M’s Salon, a matching event run by Mizuho Bank for large and start-up companies.
The MONET Consortium, a joint partnership between SoftBank Corp. and Toyota Motor Corp., aims to improve mobility. These companies are an example of a private-sector initiative. Several start-ups are also participating in this initiative to improve their global competitiveness.
The Japanese government has also been unfurling a range of initiatives aimed at creating innovation ecosystems, the formation of centers of innovation that can be expanded on a global basis based. This initiative will be expanded based on the strategy of the creation of Startup Ecosystems, and also will support J-Startup, a program for nurturing global startups
In addition, JETRO, a government agency supervised by the Ministry of Finance, will give Japanese companies a constructive role in open innovation to major overseas ecosystems and seek promising collaborative partners to bring them to Japan, in order to turn it into a global innovation hub.
The number of collaborations between Japanese companies and overseas start-up companies is still small compared to Europe and the United States. However, in recent years Japanese companies have begun to invest in international start-up companies. The SoftBank Vision Fund is one of the most notable examples these days.
This fund does not bring the invested sector or company under the umbrella of the SoftBank community. By doing so, SOFTBANK aims to develop alliances with only the best companies in the world and form a group of companies that can achieve long-term growth.
Among the companies that have entered the Japanese market, Slack Technologies, Uber Technologies, and OYO Hotels & Homes are the major investors. Cal Henderson, co-founder of Slack Technologies, states that the SoftBank Group is an important collaborator in the development of the Japanese market .
The Japan market boasts the second largest number of users after the United States. Regarding Uber Technologies, together with Toyota Motor Corporation and Denso Corporation, the SoftBank Group has agreed to invest in this Uber Technologies. With this investment, SOFTBANK Group will have 90% global share in the ride-sharing business.
In addition, Sony Corporation and Daiwa Capital Holdings Co., Ltd. have established the Innovation Growth Ventures, and are aiming to invest not only in Japan but also in North America and Europe, focusing on AI and robotics.
Investment status of Japanese startups by overseas companies
The opposite example is the investment by foreign companies in Japanese startups. This includes PLAID, Inc., which operates KARTE, a real-time customer service platform implemented with Google’s capital. And also scratch Co., Ltd., a company which runs b→dash, a marketing platform implemented with capital from ABEJA, KKR, a deep learning systems provider.
There are also cases of cross-border M & A. The 2019 M & A included the acquisition of Pocket Concierge, an online restaurant reservation and payment network, by American Express Company, and the acquisition of translation crowdsourcing company Gengo by Lionbridge Technology, Inc. from the United States.
The report provided an overview of Japan’s innovation and open environment for innovation.
Given the rapid changes in Japan’s industrial system, social structure and competitive environment, Japan cannot continue to stick to traditional business models in order to maintain and enhance its competitiveness. Rather, it is necessary to actively integrate domestic and foreign capital and develop Japan-led innovation in the world.
To do so, Japanese companies need to free up their real assets and technological resources and form-partnerships with emerging companies, and build an innovation ecosystem that includes not only Japan but the entire world. Further promotion of open innovation is expected to help to create a climate that encourages Japanese companies to invest in foreign start-ups, which will facilitate co-investment and collaboration.