Letter From Tokyo: Modern-Day Shogun

Kimio Arai's vision is guiding Japan into the 21st century "Is that man really Japanese?" asked the CEO of a major Western agency group who met Kimio Arai, the straight-talking president of Tokyu Agency, Japan's third-largest agency. It's not an idle question. Many Japanese executives have been asking the same thing for over 40 years. Why? Because Arai has spent his career advocating controversial economic reforms--from an equitable sharing of the tax burden to privatization of Japan Railways and Nippon Telegraph & Telephone--that fly in the face of tradition or threaten the powers that be. "The bureaucratic system that has provided the backbone of government in postwar Japan is now collapsing internally under the enormous weight of its own corruption," he says. An economist by training, a reformer by persuasion, Arai is a master at challenging the status quo. "Innovation changes the system. When plans to connect every household in Japan to fiber-optic cables are implemented, the nature of democracy will be changed forever. People will be able to express their views directly," he explains. Why are the radical opinions of a modern-day shogun tolerated? Arai is irrepressible. And, as a man well-known in the upper echelons of government ministries and business organizations, his ideas have intellectual substance. Arai may be controversial, but he's got the backing of the Tokyu Group, a powerful friend. Arai's introduction to advertising began in the late '50s, when he was lecturing at the Japan Management Association. There he was introduced to Noboru Gotoh, an entrepreneur who was building the Tokyu Group. Interested in the role of ad agencies in business and society, Gotoh asked Arai to develop a concept for a new agency. Arai's response was revolutionary for the time: He envisioned an agency that would not handle competitive clients and would not be tied to a media owner. Gotoh discussed the idea with Hideo Yoshida, then president of Dentsu and the architect behind the present-day giant agency. Arai's ideology found favor with Yoshida, who believed Dentsu needed tough competitors. As such, he invited Arai to spend one month learning how Dentsu did business. The idea was to give economist Arai an intimate view of how a full-service agency could be organized--the kind of systems, procedures and methods it used. The big question is: Why did Yoshida make such an extraordinary offer? Even then, Dentsu was the dominant agency in Japan. But Yoshida wanted to create more than a powerful company; he wanted to build a strong, modern ad industry. In those days, advertising was seen as a low-grade occupation that educated people should avoid. It's rumored that when Yoshida told his family he was joining an agency, his mother chastised him for "becoming a sign painter and bringing shame and humiliation on the family." Hence, helping Tokyu was smart business. If Gotoh and the Tokyu Group started new agencies and succeeded, the entire ad industry would benefit. Yoshida's instincts and Arai's education paid off. The Tokyu Agency was founded in 1961. Today, Tokyu Group's 400 companies, two universities and eight foundations comprise the largest conglomerate in Japan's service sector. The group also owns hotels, retail outlets, railways, real estate, leisure developments and an airline. Last year, revenue topped $35 billion. Arai can accept part of the credit. He held various management positions at the agency until 1970, when he moved to Tokyu Corp., the agency's parent company. Before departing agency life, he summarized his thoughts in Entry to Marketing, the first Japanese book on the subject. Over the next 25 years, Arai wrote more than 100 books that detailed the need for economic change. He also held various management roles at Tokyu. Ever-prescient, he argued in Rest Salaried Workers (1972) that Japan's overproduction and export orientation would create trade friction. His prophesy came true in the early '80s. Western governments contrasted the easy access the Japanese had to their consumer markets (particularly automobiles) with the great difficulty Western firms had in making headway in Japan. In 1982, prime minister Nakasone appointed Arai to the government's Administrative System Study Council, where he argued for the introduction of a European-style indirect tax on goods and services. This was enacted in 1989, when a 3 percent sales tax was introduced, the first tax reform in Japan in 40 years! By the mid-'80s, Japan had moved onto the world stage as an economic titan. Sensing the changing currents, Arai wrote Abandon Japan (1986). He again propounded a radical idea: It was time for Japan to embrace global ideas and standards and jettison outmoded ways. The suggestions proved so controversial that right-wingers drew their swords in anger. Literally. They slashed copies of the book and returned them to the publisher, who quickly got the message. The book was withdrawn after selling only 30,000 copies. Undeterred, Arai switched gears. He decided to cloak his radical message in four parables about Japanese leaders from the 15th century onward titled The Weakness of Japan's Leaders. Such a subtle presentation of new ideas struck a chord. Businessmen wondered how the shoguns would handle modern challenges. "The lesson of Japanese history from the 15th century to today is that when Japan is in harmony with the world, it prospers. When it fights against global currents, it weakens," Arai says, neatly summarizing his thesis. By 1989, Arai's pen had proved mightier than his enemies' swords: He was installed as chief executive of the prestigious think tank Tokyu Research Institute, a position he still holds. The move gave him a platform and new-found legitimacy. But the realities of engineering change in a country where government reigns, bureaucracy rules and business is carved out of personal fiefdoms remain. "The Japanese are industrious, but there's a problem in the decision-making process," Arai admits. "There's a tendency to keep quiet and follow the herd. The fallacy of this is evident from the sokaiya scandals affecting many major companies now." Hoping to chart a new course, the Ministries of Posts & Telecommunications, Transport and Finance recruited Arai for policy councils that are steering Japan's entrance into the 21st century. Given his status, why did Arai return to agency life? In 1992, Tokyu Agency faced a financial crisis that threatened its survival. Arai returned as president in 1993 to an agency that had accumulated debts of $40 million. Profits had plunged from $4.7 million to $120,000 on an income of $171.9 million. Arai turned inward for a solution. "We intend to shine for creativity, qualitatively and quantitatively, as quickly as possible," he says. Though alarmed by Tokyu's problems, the agency's 2,700 clients, including 7-Eleven, Nippon Telegraph & Telephone, Hitachi and Lion, Otsaka Pharmaceutical and Nestlƒ, stood firm. Their loyalty was rewarded. Arai wiped out the agency's debts and restored its finances within three years. In '96, the agency made $11.3 million profit on billings of $161.7 million. Now, the ever-visionary Arai plans to take the agency public in 2000. But problems still plague Japan's ad industry. It's an industry dominated by two powerful oligarchies, Dentsu and Hakuhodo, which account for more than one-third of media buying. Old ideas stand in the way of progress. Japan's recent TV-buying scandal--stations were discovered to have been routinely cutting spots from schedules--demonstrates the problems that ensue from a rotting infrastructure. Arai wants several problems tackled, including the lack of transparency between agency and advertiser and the accepted practice of Japan's dominant agencies handling conflicting accounts. "It's an unnatural restraint on competition in the advertising industry and business generally," he says. Not surprisingly, Arai predicts that advertising and the media are hurling toward change, fueled by technology. Growth in digital media will alleviate Japan's historical problem of media shortages, while emphasizing planning as the key media discipline. "The new competition between agencies will be in terms of planning, ideas, brand building," Arai explains. "The major power shift will be from agencies that own the existing land to those that have the smarts to use new opportunities to the advantage of advertisers and consumers." At 70, Arai remains passionate about ideas and their power to shape the future. "International voices [about Japan's ad industry] must be loudly and clearly heard." An unrepentant optimist, he's titled his latest book Onward to a Nation of Creativity, discussing the transformation he feels is within Japan's grasp. Arai is also thinking of transforming Tokyu. Once the agency has achieved its stock-exchange listing, equity-based links with other agencies are possible. While he has no current plans to move operations overseas, he's alert to future options. If he finds an international partner at the forefront of innovation in marketing and communications, he envisions "a partnership between Mount Fuji and Mount Everest." David Kilburn can be reached at kilburn pobox.com

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Letter From Tokyo: Modern-Day Shogun

David Kilburn

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