Report No.17
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Japan Entrepreneur Report No. 17 March 2004
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- The dark side of Japanese finance
- Bill collecting with Steven Gan
- Criminals as entrepreneurs
- Gillian Tett on Japan's banking sector
- Bits and bytes
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The dark side of Japanese finance
Speaking the polite Japanese of a seasoned businessman, the well-dressed
visitor to Steven Gan's cramped Tokyo office introduced himself as an
"investigation services colleague," so Mr. Gan invited him inside to get
acquainted. For a few minutes, the two men made chitchat over cups of
cold mugicha barley tea. Suddenly, the stranger's face darkened.
"What the hell do you think you're doing, trying to collect debts here in
Tokyo?" he growled in the unmistakable slang of the yakuza, Japan's mafia.
He pointed at Mr. Gan with fingers mimicking a gun. "Get out of this
business now, or...bang!" he snarled, squeezing a mock trigger toward the
stunned foreigner's head.
Distraught and too afraid to open the door after the stranger departed,
Mr. Gan sat alone until after midnight, two half-empty cups of mugicha
the only witnesses to the threat. He grew quietly more desperate about
the prospects for his fledgling debt collection business, launched less
than a year earlier. His first big break had only recently come into
sight--70 orders from an international chamber of commerce in Tokyo.
A certified public accountant and expert in credit risk management--the
art and science of preventing and recovering bad debts--Mr. Gan was
trying to develop a debt collection business in Japan using methodologies
already proven effective in the United States. But the gangster's visit
seemed to symbolize Japan's resistance, not only to Mr. Gan's fledgling
business, but also to tackling the real problems behind the nation's
plague of bad loans, an economic blight some estimate at over a trillion
dollars. Shivering despite the summer heat, Mr. Gan felt his mind drift
toward a grim and persuasive conclusion: his business goals and his
ideals about establishing world-standard collection and credit management
procedures in Japan were simply not worth the risk of violent death.
Nevertheless, Mr. Gan ultimately decided to stay in the debt collection
business. The yakuza threat never materialized and eventually became an
isolated memory. After a decade of effort, he expects his 20-person
company to gross about U.S. $3 million in 2004.
In a nation where commercial past-due accounts are collected primarily by
lawyers and gangsters, it is remarkable that Gan, a foreigner and neither
an attorney nor a criminal, is a player in the field. Even more
impressive is the unfathomed opportunity he sees ahead.
"Japanese firms have accounts receivables of 90 trillion yen--more than
U.S. $800 billion--for ordinary commercial transactions. And that's all
completely separate from the loan sector," he says. "There's room in the
market for at least another 500 agencies like ours." The typical fee for
a successful collection is 35 percent; assuming that five percent of
outstanding bills become delinquent and 40 percent of those are
collectible, that's an untapped market worth more than U.S. $5 billion.
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Bill collecting with Steven Gan
Gan grew up in Chicago, a trained CPA who honed his credit management and
debt collection skills working for the family company. But he eventually
sought a bigger challenge by moving to Japan in 1989, pursuing his
ongoing fascination with the country he glimpsed during a college
internship in Tokyo.
Gan found work as a finance controller for a large U.S. company in Tokyo.
A couple of years later his uncle, head of a Chicago collection agency
for 75 years, asked for help collecting from a Tokyo book store that owed
money to a publisher client. Similar requests followed, and in spite of
advice from friends and colleagues that debtors would never respond to a
non-Japanese "outsider," let alone discuss and negotiate repayment
schedules, Gan found his sympathetic yet business-like approach effective.
He enjoyed giving debtors the rare chance to tell their story, even if he
didn't understand everything due to his limited Japanese, and he
considered collections a valuable function in an economy paralyzed by
debt problems.
Gradually Gan became fascinated with the problems and opportunities in
Japan's highly regulated debt collection sector. According to Japanese
law, only attorneys are authorized to collect commercial accounts
receivable, the debts owed to companies by individuals or by other
companies for goods delivered or services performed. Since Japan has
relatively few lawyers, and even fewer with debt collection expertise,
some recovery activity falls into the hands of the Japanese underworld.
It often makes sense for clients to employ the yakuza rather than
attorneys. Not only do the criminals have more professional expertise
collecting debt, they can actually be cheaper, since they work on a
performance-only basis, unlike lawyers, who charge a fixed fee regardless
of outcome. But their presence means the debt collection sector presents
dual barriers to entry: the lawyers' cartel and the danger of dealing
with criminals.
Gan nonetheless resolved to start his own debt collection service. He
found a loophole in the system, exploited by a few others before him,
that allowed non-lawyers to perform above-board collection activities.
Companies that join together in a loose alliance called a kumiai are
authorized to represent each other in certain business matters, including
debt collection. Gan set up shop as one of about 200 such kumiai, most of
the others being small, static local organizations of a few cooperating
companies. Gan pushed the kumiai concept in an aggressive,
entrepreneurial way, actively marketing his services and soliciting
prospective customers to join the kumiai specifically so he could legally
represent them as a debt collector. Today he counts about 700 companies
as customers and is bullish on future prospects.
But success didn't come easy. Gan's first big break came in 1993 when the
American Chamber of Commerce in Japan hired him to collect unpaid bills
for ads placed in the Chamber's magazine by American and Japanese
companies. Japanese customers were slower to come on board, due more to
poor visibility rather than to weak demand. For example, more than 400
Japanese chambers of commerce turned down Gan's offer to provide free
debt collection seminars, with gatekeepers telling him that "our members
have no need for such information." But when he finally landed his first
Japanese chamber of commerce speaking engagement, the room was packed
with enthusiastic businesspeople, despite weak publicity marked by the
sponsor's failure to mention his seminar in its newsletter.
The floodgates opened after he landed the account of a major Japanese
bank's credit card subsidiary, giving him a powerful reference client.
Higher visibility led to exciting and unusual assignments, including
becoming the agency of choice for Las Vegas and Atlantic City casinos
collecting from Japanese high-rollers who skip town without settling
their tabs.
Gan's burgeoning success posed a new problem: he was now on the radar
screens of Japan's bar associations. Japanese attorneys had always
challenged the loophole that permits kumiai and threatens their monopoly
on the commercial collection business. Unable to stop the kumiai in
either civil or criminal court, the bar associations saw Gan as a looming
challenger effectively exploiting a grey area in the law that endangered
their monopoly. Over the years the bar associations have subjected Gan to
various "inquisitions," including public pressure and veiled threats to
shut down his operation.
While less personally threatening than a gangster wielding an imaginary
pistol, the lawyers' tactics nonetheless filled Gan with even firmer
resolve to stand his ground.
"I believe what I am doing is right and good for Japan's economy," said
Gan. "I am not intimidated by the bar associations, who have no authority
whatsoever over me or what I do, and whose members egregiously underserve
the very business segment over which they claim exclusive authority."
Being a foreigner perhaps makes Gan less subject to the cultural web of
obligation and shame that tends to stifle Japan's advocates for change.
Gan has used the media to expose his rivals' tactics. In a thinly-veiled
attempt to intimidate the American, Tokyo's three bar associations sent
a questionnaire to member lawyers in 2003, soliciting information about
negative experiences with Advance & Associates, Gan's company. That
action alone would have been enough to cause most Japanese small firm
owners to capitulate, but Gan refused to be bullied. He showed the
questionnaire to editors at several newspapers and magazines, who in turn
contacted the main lawyer association's surprised chairman. The
attorneys haven't bothered Gan since.
Still, the media can be a mixed blessing. Fixated on the image of debt
collectors as gangsters, reporters tend to ignore what Gan actually says
in interviews and to instead depict his collection agency as a kind of
"Japanese mafia group run by a foreigner," when in fact, says Gan,
"nothing could be further from the truth."
"Expert collectors like us know that unless a debtor has both the will
and some means to pay, the effort to collect is futile. The typical
Japanese collections call is like a parody--shouting at debtors, slamming
down the phone, trying to humiliate them. We find that most debtors
respond better to a sympathetic ear and a practical, solution-oriented
approach," he says. Meanwhile, Gan finds that the law firms' approach to
collections in Japan is largely ineffective.
"They charge their client a fee regardless of the result. Yet in many
cases all they do is write a demand letter. There is none of the
telephone and personal follow-up essential to achieving a good, sustained
success rate. Again, it's a kind of parody--merely going through the
motions of collecting," Gan says.
Gan takes a modern, rational approach to collections, offering 100
percent contingency-based terms and assurance that his company will
actively engage his client's customers without abusing them. He also
strives to change customer perception of debt collection from an after-
the-fact salvaging of revenue to a strategic part of the credit cycle.
His toolbox of services includes trade information data, invoicing and
payment management, accounts receivable financing, credit insurance, and
outright purchase of debt obligations.
"The goal goes beyond collection; it includes bad debt prevention and
management," he explains. Gan's credit database, unique in Japan in that
it allows users to see a company's payment performance on specific
invoices, including amounts, days outstanding, and date paid, is a
particularly attractive service feature. Uptake of these ancillary
services has been slower than forecast, yet he remains confident that
continuing efforts to educate clients will pay off.
Gan started the Japan Credit Risk Management Group, an industry
organization for those working in the credit risk management profession.
He hosts bimonthly meetings of over 40 people, hoping to promote modern
business practices and industry standards. Perhaps it's no surprise that
an outsider is taking a leadership role in redefining the collection
industry in Japan, where traditional aversion to conflict--and inadequate
official oversight and enforcement--makes the work something only
gangsters pursue with enthusiasm. With U.S. $800 billion in unpaid bills,
the stakes are too high to leave debt collection to disinterested
monopolists and criminals.
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Criminals as entrepreneurs
If Kadokura Takashi worked in Italy or the United States, he might feel
compelled to write under an alias or hire protection for his family.
That's because Mr. Kadokura specializes in analyzing and quantifying the
"underground economy"--illegal businesses run by lawbreakers including
the yakuza, Japan's version of Italy's mafia. But unlike organized
criminal rings overseas, where Mr. Kadokura's inquiries would be
decidedly unwelcome, Japan's yakuza are surprisingly acceptable social
figures--they carry business cards with logos and maintain clearly-
labeled office headquarters.
The yakuza openly operate as business organizations in Japanese society.
They hire and fire employees and go through good times and bad, just like
other businesses. One useful way to understand them is as entrepreneurs
whose activities, like legitimate businesses, are shaped by industry
structure, government regulations, and supply and demand forces.
This is big business. Japan's illegal economy was worth the equivalent of
U.S. $224 billion in 2001, the sober-faced Mr. Kadokura estimated in a
book published last year. Corporate and individual tax evasion accounted
for nearly 70 percent of that amount, but the yakuza's direct share was
$23 billion, and the Japanese gangsters were also indirectly involved, to
an unmeasured degree, in an additional $42 billion worth of illegal
activity. Other observers estimate the yakuza's total annual take at $50
billion. In either case, one wouldn't describe their cut as chump change.
Here's the question that intrigues me: why is business activity that
could be legally performed by legitimate professionals like Steven Gan
pushed into the black market? Part of the answer is that Japan's
bureaucracy hasn't authorized a sufficient number of enforcement agents,
according to Milhaupt and West (see
<www.isnie.org/ISNIE99/Papers/milhaupt.pdf>).
In the debt collection sector there aren't enough attorneys to handle
demand, so criminals take up the slack. The problem, though, is not just
the number of agents; it's their level of expertise and price-performance.
Yakuza debt collection agents offer better trade skills and lower costs
than most of their attorney counterparts; after all, this is a pillar of
their business, not just a sideline.
The yakuza are also particularly active in finance, real estate, and
other areas where governing laws are weak or ineffective. When a crack
appears in the facade of Japan's property ownership or information
disclosure laws, the yakuza may be inserted?to shore up, or to further
tear down.
When inadequate corporate disclosure keeps embarrassing information
hidden, thus making the company susceptible to blackmail by insiders,
yakuza may be hired by either shareholders or management: in the former
case to pressure management with embarrassing questions at shareholder
meetings, and in the latter case to suppress just such embarrassing
questions.
When a stubborn tenant, relying on unwritten but long-standing rules that
favor lessees, stymies a real estate developer's construction plans, a
gangster may be engaged by either party: by the owner to evict the tenant
or by the tenant to extract an exorbitant "incentive fee" for vacating
the property.
If a business owner can't obtain a loan because he lacks the physical
collateral banks typically require, he may turn to a yakuza-backed loan
shark--who may later turn on him if he finds himself unable to repay.
Underpinning all the unfortunate situations described above is Japan's
poor record in enforcing legal agreements in several sectors, its
weakness in defining what information must be disclosed, and its refusal
to present official information in useful forms. The crucial data, now
rotting on the vine, is in the form of legal property rights, financial
statements, corporate governance documents, lease agreements, contracts,
and credit ratings. Japan needs more attorneys, accountants, credit
agencies, debt collectors, and arbitrators to help write, interpret, and
enforce such documentation. In the process, entrepreneurship can be
refocused into the legitimate economy.
In short, Japan needs more entrepreneurs like Steven Gan.
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A new dawn for Japan's banking sector?
Hosoya Eiji has difficulty finding adjectives that overstate the
cluelessness of Japan's banks. The plainspoken 58-year-old former railway
executive took over leadership of Japan's fifth-largest bank, Resona
Holdings, last June after a two billion dollar government bailout for the
ailing institution. He has been struggling to revive it since.
"For the past ten years, top management let operations grow worse time
and again, all the while failing to share information with each other.
They still aren't serious about joining the new executive team in our
reform effort," Mr. Hosoya wrote in a leading business magazine in late
2003. "There are two groups: one that's sitting back and taking a passive,
'wait-and-see attitude' toward reform, and another that's waiting for the
chairman to perform some sort of magic trick or save them with a miracle.
Neither group wants to get its hands dirty; they just want to enjoy the
benefits if reform is successful."
Mr. Hosoya recalled how one central Tokyo Resona branch responded to an
executive-mandated customer satisfaction improvement initiative by
putting candies in the lobby and handing out towels to customers on rainy
days. Even more disappointing, though, was that another branch came up
with exactly the same set of actions, leading Mr. Hosoya to suspect the
two branch managers colluded to devise a nominal improvement plan they
hoped would placate management.
Nevertheless, Resona is making progress under Mr. Hosoya's leadership.
Some branches are now open evenings, and employees are learning that
customer service means more than free candies and towels. Most Japanese
banks are less clueless than Resona, and grow more savvy all the time.
Indeed, 2003 appeared to be the dawn of a new day for banking in Japan.
If one were to choose the single person most responsible for this
fledgling renaissance, Tim Collins, an American, would be a reasonable
candidate. Mr. Collins and his Ripplewood fund bought the insolvent Long
Term Credit Bank of Japan (LTCB) in 2000, and in just four years
transformed it into the immensely profitable Shinsei Bank. When Shinsei
went public last month, its stock shot up nearly 75 percent the first day,
and as of this writing was still more than 76 percent above its initial
offering price.
LTCB's buyout, which shocked the nation and jumpstarted banking reform in
Japan, was detailed in an extraordinary book called Saving the Sun: A
Wall Street Gamble to Rescue Japan from Its Trillion-Dollar Meltdown, by
British journalist Gillian Tett. Speaking to a standing room only crowd
in Tokyo last week, Ms. Tett seemed to doubt the Japanese government
would now sell its stake in Shinsei, even though selling could land a
huge profit on the money Japanese taxpayers invested to bail out
Shinsei's failed predecessor.
"The Japanese government exercises power more by stopping things from
happening than proactively making things happen," she said. "To the
extent that the government sees Shinsei as a kind of experiment in
letting gaijin come in and run a bank here, I don't think they will sell.
That would weaken their ability to influence things at Shinsei, despite
the big gain they could grab by making a decisive move to sell."
Ms. Tett's comment highlights Japan's twisted combination of excessive
regulation, lax oversight, and weak enforcement. Ordinarily one would
expect a government to adequately control a nation's banking system
through laws regulating the sector, not through owning bank stock. But
Japanese banks used excessive regulation as an excuse to give domestic
consumers some of the world's worst banking service and products.
Meanwhile, poor oversight allowed reckless lending to uncreditworthy
corporations. Japan's banking system almost collapsed as a result, and
LTCB's sale to Shinsei was one attempt to save an industry gone badly
awry.
Tett noted, though, that the American investors who bought LTCB were
engaged more in "political arbitrage" than a financial turnaround.
"Given the price and the fact that the bank had some healthy operations,
the success hinged less on business factors than on whether the new
Shinsei management could make the government deliver on its promise of
taking back any undisclosed bad loans Shinsei found in LTCB's portfolio
after taking over," she said.
Insiders believed many such loans existed, and in fact, controversy
flared when Shinsei found them and pushed hard on the government to keep
its promise, flouting corporate borrowers' close ties to leading
political figures and parties. Tett said it was unlikely any potential
Japanese buyer would've had the courage to take on such a battle. Indeed,
Japanese groups who considered bidding on LTCB later admitted that they
didn't believe the government would actually honor the buyback clause.
They feared the government considered the promise to take back bad loans
less of a legal obligation than an enormous "favor" that under Japanese
cultural rules would require reciprocation of unmanageable magnitude.
Shinsei lobbied skillfully for its letter-of-the-law interpretation of
the agreement, resulting in a smashing investor success, Tett agreed. She
also said that the pragmatic, flexible approach of Shinsei's management
team, which still includes many non-Japanese, gives it a good chance of
staying one step ahead of bigger, tradition-bound competitors.
While the jury is still out as to Shinsei's impact on reform in Japan's
banking sector, Ms. Tett sees the bank as a catalyst.
"The other banks now can use Shinsei as a convenient excuse to get
tougher with borrowers, telling them, 'Well, you know we normally would
like to extend you more credit, but now with those foreigners over at
Shinsei taking the kinds of stands they do with their borrowers, it's
much harder for us to do things the way we used to'."
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Bits and bytes
Carl Kay wrote "Bill collecting with Steven Gan" and "A new dawn for
Japan's banking sector?" for this issue. Thanks, Carl, for your
excellent continuing series on entrepreneurship by foreigners in Japan.
JER is on a finance kick. More about banking next month, this time with
more focus on the clued-in rather than the clueless.
Long-time Tokyo resident and serial business-launcher Kerry Kennedy will
talk about "The ABCs of Entrepreneurship" at the next Entrepreneur
Association of Tokyo meeting on Tuesday April 6, 2004. See
<www.ea-tokyo.com> for details.
Tim Clark
Senior Fellow
SunBridge Corp.
Voice (U.S.) 503.235.4419
Fax (U.S.) 503.235.4429
clark@sunbridge.com
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