The Rise of Japanese SaaS-what it means for the world
When the black ships turned up and demanded that Japan open its borders in 1853, the ruling classes quickly embraced the slogan, “catch up, then overtake.” The powers-at-be in Japan knew they were behind the industrialized West and needed to play catch up.
In the late 1940s, a similar singular focus emerged amongst politicians and bureaucrats to drive the post-war recovery. It was clear what the country needed to do. And charismatic leaders like Yoshida Shigeru, along with capable civil servants, went to work.
Japan’s debt-fueled economy came crashing down famously in 1989. It was a traumatic event but the end of the bubble did not create a similar singular focus for the people in charge.
Instead, the country meandered from policy to policy, desperately trying to find its footing in an ever-changing world.
It was not even clear what the strategic focus should be. Should the country embrace US-style laissez-faire capitalism or pursue something peculiarly Japanese?
Initiatives like Kokusaika (internationalization) were promoted but they were superficial efforts at best and, at worst, an elaborate waste of taxpayer’s money. Efforts at boosting the economy also lacked imagination. Roads were built to no-where and small towns got sport stadiums that were fit for sport hungry cities, the size of Melbourne.
Part of the reason why there was such a lack of direction from the top was because there was no real sense of crisis.
Japan had big structural problems but it remained a wonderful place to live. People were wealthy. Prices were falling. It was possible for people to enjoy a good life and go on as they had always done.
But then Covid struck.
Covid, like in other places around the world, represented an existential crisis for the Japanese. It drew attention to the flaws in the way Japan was run more than any activist hedge fund manager or ambassador from the US had ever done.
Something needed to change.
Japan was woefully behind when it came to being digital. At a time, when working from home and remote engagement became commonplace, the gulf between Japan and other countries became very noticeable.
In Japan, less than 12% of administrative work is transacted online (McKinsey Global Institute). The country lags 23rd among 63 countries in the world for digital competitiveness (IMD World Digital Competitiveness Ranking 2019) .
Despite looking like a technological nation from afar, the country is more analogue than digital. And it has traditionally relied on a piece of wood, a hanko, with a personalized signature carved in the bottom, to verify most of the paperwork!
To be fair, the Japanese government had been pushing the digitalization agenda for 20 years but it took Covid to be the catalyst for real change to happen. Covid impacted the way things were done practically overnight.
Meetings were no longer face to face. Digital signatures were preferred to signed paperwork. Corporations allowed people to work at home. And even old people began shopping for their groceries on the web.
Covid gave the top down government policies teeth. It gave the powers-at-be a singular focus again. There was no going back.
Covid has allowed the government to take much needed measures to improve efficiency through digitalization ahead of a declining population and upcoming labor shortages.
The Japanese stock market has discounted all this very quickly over the last 12 months. Many cloud-based SaaS plays have reached new highs this year and many Founder fortunes have been made. Mothers, Japan’s quasi venture index, has even outperformed Nasdaq!
This is not, however, a short-term trade.
It is a long-term structural shift that has many implications for global tech and for overseas SaaS companies wishing to do business in Japan.
Salesforce, a SaaS company that has been very successful in Japan, describes digitalization as “a process of using digital technologies to create new business processes, culture and customer experiences to meet changing business and market requirements.”
Digitalization is the process of companies starting to reimagine everything they do, realizing game changing efficiencies and delivering personalized customer experiences.
In a country where the hanko is still widely used, the opportunities for real change are huge. Japan, in many ways, is a sleeping SaaS giant. Every sector of the economy provides a blue ocean of opportunities.
Andreesen Horowitz, the US based VC firm, suggested that software would eat the world but they forgot to mention how the opportunity for Saas companies in Japan dwarfs many nations. By 2021, the broader software market is expected to reach $19 billion and SaaS will top $6 billion, according to the Fuji Keizai Group.
Japan: a source of great innovation for the world
For the last 30 years, Japan has fallen behind when it comes to innovative technology products. Sony famously should have built the smart phone instead of Apple. But Sony failed to innovate.
In some ways, SaaS products are similar to consumer tech products, which the Japanese excelled at from the 1960s to the 1990s. Producing a consumer tech product is 10% inspiration and 90% customer feedback. In a similar way, producing a world class SaaS product, whether for business or for the public, is an iterative process, not an innovative one. Iteration is where customer retention is won or lost.
With Japan’s traditional customer and process focus, there is every reason to believe the Japanese will excel at producing state of the art cloud-based SaaS solutions.
Japan is also further along than other developed nations when it comes to dealing with an aging population and a declining workforce. These are pressing issues that need solutions quickly. A 2019 survey showed 79% of companies in the nursing and caregiving industry are understaffed (Japan Chamber of Commerce and Industry).
Japan has every chance of becoming a thought leader in these verticals, not just a follower. “Silver tech,” tech solutions focused on the elderly, might be a $10 trillion opportunity, according to Yannick Oswald, a venture capitalist in Europe.
Currently, however, the Japanese companies that have done well are clones of what has worked already overseas. The accounting software plays like Money Forward and Freee are perfect examples of this. This is natural. Things will evolve and it is surely a matter of time before we see a SaaS solution as the leading constituent in the Nikkei.
For foreign software firms, there is endless opportunity to explore, especially as Japan is going out of its way to encourage foreign firms to move to Japan. Japan has open internet and strong intellectual property enforcement, unlike other Asian markets. Language issues can be overcome and effective sales and customer success teams can be hired. Companies like Salesforce have even laid out a playbook to succeed in Japan. The ocean might be a lot bluer in Japan than in the US, where competition is fierce.
A wave of new fast-growing companies will be a much-needed boost to the Japanese economy and the markets. We might be only a few years away before multiple globally relevant Japanese unicorns emerge in areas like telehealth and aged care.
Softbank’s Son should take note.
Rather than blowing more money on the next hyped Silicon Valley golden child, he might be able to find a multi-bagger in his backyard.