After COVID-19, Japan Will Be a Greenfield Opportunity For Technology Companies

Back in mid-February, as most of us were just beginning to pay closer attention to the novel coronavirus, anxiety was rising in Tokyo as cases began popping up in various parts of Japan without any traceable connections to China. We were there at the time for our annual Geodesic Forum event where we bring over a select group of tech companies for a year’s worth of meaningful introductions in just a few days. As our companies ran through curated one-on-ones, presented onstage to hundreds of potential customers, or networked with executives at the US Ambassador’s residence, ominous headlines loomed in the background. There was a lone taxi driver, an elderly woman in the countryside, and, of course, the Diamond Princess cruise ship docked in Yokohama that were all part of an increasing number of cases making news as the virus began to make its way out of China and across the world.

Early on, the Japanese government began warning against large gatherings, asking companies to consider having staff work from home or stagger work schedules to reduce commuter traffic, and moving to shut down schools. There was an encroaching sense of unease bordering on doom as cases would soon spike in neighboring South Korea and Europe, and questions loomed about the 2020 Tokyo Olympics, which Japan had long been preparing to host.

Japan braced for the worst and watched closely what was happening in New York, especially. But in the weeks and months that have unfolded since, while not spared completely, Japan, with 16,501 total cases as of May 26 (source), has somehow been relatively far less impacted than many other countries. Though there have been spikes and scares and a national emergency declared, the situation has mostly subsided for the time being, with just 29 cases reported nationwide on May 26 (source).

There has been much speculation and mystery around the reasons why Japan seems to have escaped the worst (so far), despite not enacting the widespread and mandatory stay at home orders and closures of restaurants and retailers that other economies have endured. Perhaps even more surprising is the fact that Japan recently ranked second to last among OECD countries in testing per capita (source). For a period of time in April and May, cases increased steadily, particularly in Tokyo, but have remained extremely low compared to peer cities around the world. Like everywhere else there have been concerns about the capacity of the healthcare system (Japan reportedly has just five ICU beds per 100,000 people compared with 35 per 100,000 in the US — see source here). Despite these worries, restaurants, izakayas, barbershops, and pachinko parlors have remained open throughout the crisis. Although train ridership was down a reported 60 percent at one point (source), another poll found that just 18 percent of Japanese employees were working from home (source).

So, despite what seems to have been a somewhat limited effort at social distancing, the number of deaths in Japan, a country with an aging and vulnerable population, has also remained low at 859 as of May 26 (over 100x fewer than the United States). Arguably, Tokyo is more densely populated than New York and is just as connected to the rest of the world, especially with China. Prior to the crisis there were three daily flights from Wuhan to Tokyo, not to mention Seoul and other hotspots in Europe. Before the arrival of COVID-19, Japan hosted 10 million visitors from China per year. Tokyo, by almost any estimation, should have been one of the hardest-hit places in the world.

What explains Japan’s experience?

Some have argued that the aggressive, relatively early actions taken by the government (not only to protect public health, but also an attempt to save the 2020 Olympics — which were, of course, postponed a few weeks later) made a difference at just the right time. Others have suggested there are cultural and societal reasons: the Japanese don’t shake hands, hug, or kiss when greeting each other, they are accustomed to wearing masks during flu season to protect others, and they maintain a strict adherence to cleanliness in general. Some have said that Japan’s healthcare system and generally healthy population with a life expectancy among the longest in the world are all factors. There’s a theory that long required tuberculosis vaccinations for infants have played a role in preventing a wider outbreak. Others have suggested Japan’s cultural emphasis on the group as opposed to the individual means citizens have been more likely to consider the health of others when making personal decisions amidst the pandemic. There are even theories out there that Japanese speakers cast fewer droplets into the air (see here) or that Japan’s version of the virus is a different strain altogether. Maybe it’s Japan’s relatively stable politics (particularly when compared to the United States). Prime Minister Abe, in office since 2012, is now Japan’s longest serving prime minister in its history. Americans may find it interesting that rather than refusing to wear a mask, the Abe administration mailed masks to every household in the country. Maybe it was some combination of all of these factors mixed with a fair amount of luck. Whatever the truth is, even though Japan seems to be emerging from lockdown having mostly avoided the much worse fate of other places, they (like everyone) will need to meet the challenges of the new normal in order to effectively operate in a post COVID-19 world.

As a Silicon Valley based venture fund whose value-add proposition is to help the best technology companies in the world navigate the Japanese market, we spend a lot of time thinking about Japan. So, we’ve been monitoring Japan’s experience closely and digging into what it means for our partners and portfolio companies. Although Tokyo hasn’t ordered a complete lockdown like other major cities around the world, as I noted, the government did strongly urge companies to have employees work from home starting in roughly mid-March. Most major corporations in Tokyo complied, and like most places, business as usual suffered a major disruption, and many employers and employees found the need to acquire and adopt new technology quickly.

In Tokyo, the shelter in place situation was particularly disruptive, forcing major employers to rapidly rethink the way their workforce does business, how they make decisions, and re-evaluate the digital tools they use and their capacity for remote working. In recent years, Japan’s migration to cloud computing has greatly accelerated. The impact of COVID-19 stands to drastically expedite the adoption of cloud native applications and the associated security, development, infrastructure, and other IT services to run modern businesses that were long averted in favor of legacy IT systems in place at many major corporations. My colleague Morgan Livermore explored this acceleration in a recent article.

In corporate Japan, there is sometimes a feeling that the IT Department is more of a procurement office that relies on systems integrators to build the technology stacks that run their massive, global operations. The concept that “nobody ever got fired for buying IBM” has made it challenging for many of the newer enterprise software companies to break through. In the past, the IT department hasn’t typically been seen as strategic in nature. But that had started to change — and COVID-19 is aggressively speeding up that transformation.

Much has also been made of the so-called “hankou problem” in Japan. It’s a system where physical ink stamps are necessary to certify and authorize documents and business decisions, requiring some employees to take the train to the office even during COVID-19. Document couriers have also been getting quite a workout. Working from home has quickly exposed the need for digitalization here, too.

COVID-19 has shifted digital transformation from a corporate buzzword to an imperative for survival almost overnight. Japanese leaders have long since acknowledged the looming challenges of both an aging and shrinking population, but have sometimes lacked the impetus for change — until now. The need for automation, efficiency, and operational agility will be more prominent than ever before coming out of the crisis. For now at least, Japan is emerging from the first wave of the crisis before most of the rest of the world and with the lifting of the state of emergency nationwide on May 25, many Japanese are returning to work with a new perspective.

The Japanese government is already moving to set the tone. On May 20, Yasutoshi Nishimura, the minister leading Japan’s COVID-19 response, announced a partnership with one of our portfolio companies, UiPath and Microsoft to leverage AI and RPA (robotic process automation) technologies in the ongoing effort to contain the virus. We expect to see more of this.

The Opportunity

This giant wake-up call for Japan is a major opportunity for technology companies focused on the Japanese market, one that is sometimes seen as difficult, slow, or too costly. At Geodesic, we are in the business of changing that perception, by guiding our portfolio companies into Japan and supporting them as they scale. Coming out of COVID-19, and into a new era where digital transformation takes on a new sense of urgency in the third largest economy in the world , Japan is set to be a greenfield opportunity for technology companies looking for global growth through new customers and sources of revenue. And by the way, Japan’s often considered the second-best market for enterprise software — just ask Salesforce.

We’ve long believed Japan to be a great place to do business for technology companies. In fact, we built our fund around that idea. Portfolio companies like Tanium, Databricks, Netskope, UiPath, and DataRobot are scaling there with our support and seeing Japan grow into a major source of new business and growth).What they see is a market characterized by loyal partners and customers, a sophisticated and educated middle class economy, commitment to the highest quality and service standards, stable IT infrastructure, respect for IP and rule of law, and high standard of living. And that was before COVID-19.

Now, Japan is emerging from this global crisis less impacted than other markets like the United States and Europe. Corporate customers have capital to deploy and are eager to digitally transform by adopting more cloud technologies and modernizing legacy systems. Japan can be a lifeline for western technology companies in search of growth as the markets they focused on pre-COVID-19 are slower to recover. Our friend Jesper Koll noted in the Financial Times that going into the crisis, Japanese corporations held $6.5T in cash (amounting to 130 percent of Japan’s GDP). Corporate Japan has the means and the motivation to digitalize — they simply need partners to bring them the best options.

All of this says to us that technology startups who are already in the Japanese market could be well positioned to benefit from these trends once things start to recover. There may be a few lean quarters for new business ahead, but taking care of existing customers and building compelling case studies today will position companies well. Companies who think Japan is a strong prospect market for them, or who have had inbound interest from Japanese customers, may want to consider making their move there sooner rather than later. Putting boots on the ground is always a critical first step and is a time consuming challenge of its own, so all the more reason to get started now. (One silver lining: the labor market is considerably less tight than it was just a few months ago.) It’s understandable that some tech companies are putting off international expansion in the near term in the midst of this global crisis, and it may sound counter-intuitive for us to suggest investing in Japan when hiring freezes and cost cutting are the means of survival for now. But for companies with the resources and a longer-term view who have the patience and commitment to invest in a market that has meant double digit percentage of revenue for iconic companies — like Salesforce, Apple, Twitter, and Slack — Japan, especially now, is a market where you’ll find eager and willing customers in world that might not look like it did before.

I’m not saying Japan, or particularly its economy, will emerge unscathed. In fact, far from it as Japan just recorded a second straight quarter of economic contraction (indicating a technical recession). What I am saying is that while customers and markets in the US and Europe may feel a deeper and wider impact of COVID-19, Japanese customers and partners are eager to digitize and adopt new technology. Investing in the Japanese market is a ripe opportunity that will not disappoint if you’re willing to make the commitment.