|Secrets of Kansai
By Catherine Pawasarat
Tokyo is not Japan.
Japan is not Tokyo.
Fans of Kansai urge newcomers to think at least twice before setting up shop in the crowded capital.
The Kansai region—encompassing the eight prefectures of Osaka, Hyogo, Kyoto, Nara, Shiga, Wakayama, Fukui and Mie—has a population of over 23 million, nearly 20% of Japan’s total.
The region generates astonishing statistics. In fiscal 1998 (ending March 1999), the gross regional product of Kansai exceeded $685 billion, which comprises 18% of Japan’s GDP and places Kansai seventh in world rankings, just behind Italy but ahead of Canada. Kansai’s per capita gross regional product for 1997 was equivalent to $33,505 (more than $3,000 higher than that of the U.S.), representing an enormous consumer market—as yet relatively untapped.
“Japan is the largest economy in Asia, with Tokyo as number two and Kansai as number three. Kansai has a (gross regional product) that is larger than that of Singapore, Taiwan and South Korea combined. That’s the potential down here,” says Thomas Flippen, the resident legal consultant with Osaka-based Yamaguchi International Law Offices and the ACCJ vice president for Kansai.
So why aren’t there oodles of foreign companies all over Kansai?
“It’s not that people are choosing Tokyo over Kobe or Osaka, but I think we haven’t seen much foreign entry into Japan. It appears there’s an uptake now, particularly amongst retailers,” explains Robert McDonald, president of the Kobe-based Northeast Asia branch of Procter & Gamble Far East, Inc. and governor of the ACCJ Kansai chapter.
A glance at some 1998 statistics from Toyo Keizai Inc. on the number of foreign-affiliated companies in Japan reveals a disproportionate number of companies based in the Tokyo Metropolitan Area (87.6%), compared to the number located in Kansai (8.5%). While Tokyo’s economy and market are clearly larger than Kansai’s, they are not ten times as large.
“One of the very serious problems we have is recognition. Even if a person has heard of Osaka, government studies show that most foreigners don’t know where it is. If they don’t know where it is, they probably don’t know what its benefits are, so a major company thinking about setting up in Japan probably does not think of setting up in Osaka,” says Norman Solberg, an attorney-at-law at the Solberg International Law Office, and chair of the ACCJ Kansai chapter’s Programs Committee.
Tokyo certainly exerts a powerful gravitational pull.
“Foreign businesspeople assume, ‘Japan is Tokyo, so let’s go there.’ End of discussion. And once a foreign company decides to commit to Japan, it takes formidable resources to establish a presence here. It’s hard to muster the financial resources needed to relocate. For example, there are prohibitive costs to get out of leases or other agreements that you have,” remarks Flippen.
Fans of Kansai point out that it is home to such Japanese heavyweights as Matsushita, Sumitomo, Sanyo, Sharp, Omron, Kyocera and Takeda Pharmaceuticals. However, more than 90% of the companies in Kansai are small or medium-sized.
“The economy is best epitomized by a place like Higashi-Osaka city, which is known as ‘Shacho-shi,’ or ‘Company President City.’ It has 3,000 or 4,000 small companies that each have something like a 90% market share for their products throughout the world. That is characteristic of Kansai. It doesn’t have the kind of ‘engulf and devour’ multinational-company environment that is typical of Tokyo,” says Flippen.
Why, oh why, pick Kansai?
Foreign-affiliated companies are in Kansai for very compelling reasons.
“The population is not as dense as Tokyo, and Kansai has mountains, beaches and seashore, all around. This is not just a minor aesthetic notation, either; among foreign companies in Japan, 70% of the turnover in executive-level personnel is due to family dissatisfaction about the quality of life. Quality of life is more than just buying a membership to the Tokyo American Club,” Flippen argues.
Major foreign companies like P&G and Nestlé include the excellent living environment as primary reasons for their location in Kansai, noting the access to nature, shorter commuting times, less crowding, and—in the case of Kobe—the cosmopolitan atmosphere.
To be sure, for some industries, location in Tokyo is a must.
“If you’re in insurance or banking, you need to be in Tokyo. But in other industries such as health care, food products, medical, etc., I don’t think they’re asking themselves enough whether or not it is critical for them to be in the capital,” argues Steve Iwamura, partner at Deloitte Touche Tohmatsu and chair of the Kansai chapter’s Foreign Direct Investment Committee.
Another significant appeal of Kansai is its lower costs. Land prices, rents, housing, labor and general living expenses are estimated at between 30% and 50% less than those of Tokyo.
The smaller number of foreign enterprises in Kansai could also be an advantage. (In 1998, the number of foreign-affiliated companies in Kyoto, Nara, Shiga, Wakayama and Fukui was still in the single digits.)
“Instead of being one of many, you’re in a position to stand out and be different. If you go through the ACCJ, you’ll get opportunities and special treatment that you couldn’t get in Tokyo. Every company has a different need, and we can help make things easier here,” Iwamura states.
Moreover, the neighborhood is considered to be supportive.
“The international community in Kansai is very well-defined and quite cohesive. There’s a tremendous international crossover, so you get to know people from all over the world very comfortably and easily,” says Flippen.
Kansai also offers a number of international schools, an all-important factor for expatriates.
“If we bring a family here, the first thing the parents want to do is visit the school. They know the company, they know the job, so that’s not the issue. We work very closely with Canadian Academy, so parents see the school as an attractive place. We see it as one of the better schools internationally,” says P&G’s McDonald.
Members of the ACCJ’s Kansai chapter have campaigned for government funding so that they can lower the high tuition fees for international schools in Kobe, which would be especially helpful for employees of small and medium-sized businesses. Annual tuition costs are approximately ¥1.25 million per student.
“We worked all year to get Kobe city to increase its subsidies to the international schools, and they increased it by 17%. The total subsidy is now about ¥90,000 per student, per [school] year. We want to get them up to covering 30% of tuition, which is what they provide for [Japanese] private schools,” says Thomas Reilly, president of International Ad Co. and chair of the Kansai chapter’s External Affairs Committee.
Japanese are quick to point out the independent and innovative spirit of Kansai people, particularly Osakans. As much as 70% of new business fields created in Japan over the last 50 years, which includes karaoke and instant noodles, were invented in the Osaka prefecture/Kansai region, according to the Osaka Business Information Center.
“Panasonic, Sanyo and Sharp were born here, as were instant ramen and the mahobin (large, insulated hot-water flask/dispenser). It’s the kind of town where people say, ‘Let’s do something new!’” boasts Tetsuro Kokumai, head of public relations for the Osaka city Olympics’ bid-promotion bureau.
Simply put, Kansai is distinct in flavor from the capital, but remains largely unsavored by the international business community.
“Tokyo is nice, but it has a kind of a New York atmosphere, and not everyone wants to work in New York. Some people prefer Chicago or San Francisco, and they should look at Japan in the same way,” says Iwamura.
As traditional ways of doing business in Japan chap and crack, supple new entities in Tokyo slither out of the old skins. But the upheaval of restructuring is felt much more keenly outside of the capital, affording exceptional opportunities for foreign direct investment (FDI), claims Iwamura.
“In places like Osaka and Kobe, companies undergo restructuring and withdraw to Tokyo, with nothing to take their place. The local governments can see the writing on the wall, and they realize that they have to undertake more economic development themselves—and they realize they have to do it with foreign companies.”
Today, FDI has become an integral part of the development plans of Kansai, particularly Kobe and Osaka cities, and Hyogo prefecture.
“We’ve tried to encourage the local governments here to foster inward investment, and over the last two years I’ve seen a lot of enthusiasm for that. I’ve been working on investments in Japan for over 30 years, and have never seen such enthusiasm,” says attorney-at-law Solberg.
Hyogo prefecture is leading the wave of enthusiasm for FDI, partly due to its need to recover from the Great Hanshin Earthquake of 1995, and its long history of international engagement.
“Before, a lot of foreigners lived here, and people saw Kobe as a place with a lot of international potential. After the earthquake, people felt unsettled, and a lot of businesses left for other prefectures. Now, we’re cooperating with Kobe city to welcome foreign business,” says Norihisa Mizuguchi of the international economic development division in the Hyogo prefectural government.
Incoming foreign businesses are offered a menu of municipal and prefectural tax cuts, subsidies and financing, as well as business-related services.
“Most foreign businesses are looking for monetary support, such as tax holidays. But, in Japan, much of this is controlled by the national government and so regions don’t have much flexibility. Meanwhile, other national governments have offered us ten years without taxes—it’s extremely tempting. It makes you question whether the national government is really sincere about attracting foreign business, or whether that [intention] translates into aggressive action,” says McDonald.
Under Japan’s taxation system, the central government collects revenues from the local governments, then allocates it back, explains Iwamura.
“So the central government controls the purse strings. The philosophy is ‘one country, one system.’ The central government doesn’t want different local governments making different tax deals, because it messes up the allocation system and makes it difficult to maintain control.”
Weight of central government
While some regions see the benefits of internationalization, the investment incentives they can offer remain limited by national policy.
“I’m not sure the Japanese government understands how foreign investment can boost the economy. They do seem to understand how public works projects boost the economy,” comments one executive at a major multinational concern.
Besides stimulating the local economies, Kobe city and Hyogo prefecture particularly hope to revitalize the city’s port. Though it was Japan’s busiest port in 1994, it now operates at less than 80% of pre-quake levels, despite improved facilities, says Mizuguchi.
As part of this effort, Kobe is actively promoting Port Island as a center for international business, focusing on the distribution, fashion, IT/communications and medical industries. Both the prefecture and Kobe city have set up centers to assist with FDI, including information, advisory and networking services, as well as low-cost temporary office space for foreign companies investing in the region. Three kilometers south of Port Island and eventually a 16-minute ride to downtown Sannomiya on a new transit system, an offshore airport with a 2,500-meter runway is being constructed on 272 hectares of reclaimed land. With expectations of 3.4 million passengers a year upon its opening in 2005 and 4.2 million by 2010, the airport aims to boost Kobe’s capacity as a tourism and distribution center.
“The Kobe airport will make the Port Island project much more marketable because you’ll be able to walk out your door and fly anywhere in Japan,” says Deloitte Touche’s Iwamura.
Last spring, the ACCJ Kansai chapter lent its support when the U.S. Consulate joined with the Osaka Chamber of Commerce, Kobe city and Hyogo prefecture to cosponsor a trade mission to Osaka-Kobe, with promising results.
“Most of the participants came because they believe that their companies cannot afford not to be in Kansai. The region is home to some sparkling infrastructure and to a network of small and medium-sized companies that possess some of the most advanced manufacturing know-how and technology on the planet. The prolonged business recession here has created exciting investment, acquisition and management opportunities,” explains Doug Meurs, economics officer at the U.S. Osaka-Kobe Consulate. Osaka prefecture, Osaka city and the Osaka Chamber of Commerce joined hands to form the Osaka Business Information Center (O-BIC). The center assists foreign businesses with setting up companies and learning more about local business trends, while also offering “a wealth of information on local companies and business support organizations,” says Meurs.
Still, a 1980s mindset seems to linger in Osaka.
“I think local governments are still in the learning process. They seem to be highly interested in trying to attract foreign companies, but they are saddled by bubble-era industrial park-type projects, or real-estate-dominated projects,” says Kansai FDI Chair Iwamura. “In the bubble era, Japanese companies wanted to buy the land or space in the buildings, and a lot of this was of a speculative nature. So when the bubble collapsed, the government was left with high-cost real-estate projects that were empty. They thought, ‘If Japanese companies won’t buy them, maybe the U.S. companies will.’ But U.S. companies are going to make their decisions based on economic factors, not speculation, so trying to sell them the land or office space this way will not work.”
Islands of development
For the last decade, Osaka city has been developing its waterfront, including the construction of three artificial islands. Sakishima, with its World Trade Center, and Maeshima—both costing between ¥400 billion and ¥500 billion, according to an Osaka city official—are in use and looking for investors and tenants. The city hopes that the World Trade Center’s prime location and the region’s highly developed infrastructure will attract international investors; in the lap of Kansai’s huge consumer market, the center borders the Osaka port area and is a stone’s throw from Kansai International Airport, the country’s only 24-hour terminal.
Osaka city has other plans to increase its international visibility. The 54-hectare, ¥170 billion Universal Studios Japan (USJ) opens in April. Planners expect the new theme park to draw about 8 million visitors in the first year, and hope it will eventually catch up with rival Tokyo Disneyland (around 47 hectares), which pulls in some 16 million visitors annually.
While there is enthusiastic talk about the economic effects of hi-tech TV and film-production studios for rent on the USJ lot, representatives won’t confirm that such facilities will be available.
“Film teams may use USJ facades as film backdrops,” says a marketing representative, noting that “Wild West,” New York City, San Francisco and New England facades are available, as well as a jungle environment from the Jurassic Park attraction.
Still, USJ certainly won’t hurt the multimedia industry in this part of the country.
“If you look at the Kansai area, right now the debate is about which industries the local governments should focus on for FDI. One, especially in Osaka, is film production. The rationale is that Osaka has a history of entertainment, of having creative people, and that innovative entertainment/leisure conglomerate Yoshimoto Kogyo is centered in Osaka. There’s going to be growth in multimedia hardware, but anyone who watches Japanese TV knows that there’s not enough content in Japan. The film industry in Japan is very undeveloped, so Osaka has a chance to compete,” says Iwamura.
The challenge, he adds, is for Kansai to make the switch from its habitual government-led economic development to a model where the private sector leads the way.
“Now the nature of industry is becoming so knowledge-intensive and so fast that government is not able to lead,” Iwamura continues. It has to be led by the private sector. Until now, the government told people what to do. But if you want to grow the industries of tomorrow, you can’t be telling them; you have to serve them, and private sector has to take the lead. How is that going to take place? That’s the question of the day,” he says.
If there is one industry capable of private sector-led growth in Kansai, the pharmaceutical industry may be it. With its long history as a center for eastern and western medicine, Osaka has drawn international pharmaceutical firms like Bayer, Eli Lilly, Schering-Plough, and AstraZeneca.
Reaching for five rings
The bid for the 2008 Olympics is another way Osaka City is trying to re-ignite the flame of an international presence. Though Osaka lags in the romantic-appeal department compared to the other four candidates (Beijing, Paris, Toronto and Istanbul), supporters hope that the city’s proposed venue—those new artificial islands in Osaka Bay—will appeal to the International Olympic Commission with regard to the factors of security and efficiency. Many of those wanting an Osaka Olympiad hope that the city will win by default, as other candidates are eliminated for various technical or practical reasons.
Without any national funding behind the expensive bidding process, Osaka is in a tight spot. But a big investment is worth risking, since the Olympics would definitely bring the eyes of the world toward this city. The event would also help give birth to new industries and venture businesses, says a city official, though he was unable to specify how.
Osaka is trying hard to attract international businesses, and one such major effort is Rinku Town, just across the bridge from Kansai International Airport (rinku means “near the airport”). Begun in 1986, with land sales launched in 1990, this ¥450 billion, 215-hectare development project is running behind schedule because of Japan’s lagging economy, says prefectural representative Jun Yasui. As with Osaka City’s new islands, space was originally available for purchase only, but that has to change.
“We’re aiming to make this international; but foreign companies only want to rent the land, so we’re having problems with sales,” Yasui says.
Chelsea Japan—a joint venture between the Chelsea GCA Realty Partnership, Mitsubishi Real Estate Co. and trading company Nissho Iwai Corp.—approached the prefectural government to propose opening a U.S.-style outlet/shopping center in Rinku Town. Looking at the company’s success with its first outlet near Mount Fuji, the prefecture decided to allow Chelsea to rent 42,000 square meters for its Rinku Premium Outlet, which opened last November. With close to 80 stores (including international names like Adidas, Brooks Brothers, Timberland and Coach) and restaurants, the company hopes to draw three million shoppers and chalk up ¥15 billion a year in sales.
“We are considering allowing more rentals as soon as possible. We hope to be able to do that by late 2001,” comments Yasui.
Like the Kobe and Osaka city port areas, Rinku Town has been designated a Foreign Access Zone (FAZ), with taxation and finance incentives and comprehensive facilities for importing and investment in Japan. JETRO (Japan External Trade Organization) maintains an office there, with services including access to market data and consultations with professional advisors. An IBO (International Business Organization of Osaka) Business Matching center assists foreign companies looking for business partners in Japan, free of charge, while a business center offers low-cost temporary office space to foreign companies just getting started in Japan.
If it all works as planned, the best-kept secrets of the Kansai region are the FDI developments just over the horizon.
A beginner’s links to the Kansai business world:
Osaka Business Information Center: http://o-bic.net/
Kansai Council of Investment Promotion (KCIP): http://gokansai.org/
Hyogo Investment Support Center: http://www.hero.or.jp
IBO Business Matching Center: http://www.mydome.or.jp/ibo
Rinku Town: http://www.rinku.or.jp/invitation/
JETRO (Japan External Trade Organization) (look for FAZs): http://www.jetro.go.jp/
Kansai International Airport Public Relations Promotion Site: http://www.kippo.or.jp/
What Foreign-affiliated Companies are Doing in Kansai
Medical supplies 11.3
Electrical machinery & apparatus 8.5
Precision apparatus 5.7
Machinery wholesale 25.1
Textile wholesale 10.3
Chemical wholesale 8.0
General wholesale 6.3
Electrical appliances wholesale 5.1
Other wholesale/retail 29.1
Information services 3.4
Other non-manufacturing 5.7
Source: Kansai Internationalization Data File ’99