Japan Still a Tough Nut for Agencies to Crack
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Holmes Report

Japan Still a Tough Nut for Agencies to Crack

Most PR firms generate more fee income in smaller Asian markets—Hong Kong and Singapore in particular—than they do in Tokyo, which has earned its reputation as a graveyard for ambitious American agencies.

Paul Holmes

It’s not hard to see why major international public relations agencies look at the Japanese market and see awesome opportunity.
Despite its recent woes, Japan is still the second largest economy in the world in terms of gross domestic product and the capitalization of the companies on the Tokyo Stock Exchange is greater than the capitalization of all the companies on all the other exchanges in Asia combined. Advertising Age ranks it the second largest advertising market in the world, with ad spending of $33 billion in 2000 (compared to $134 billion in the United States).
Yet Ogilvy Public Relations Worldwide estimates that Japanese companies spend only $500 million on public relations, compared to $4.2 billion in this country. Most PR firms generate more fee income in smaller Asian markets—Hong Kong and Singapore in particular—than they do in Tokyo, which has earned its reputation as a graveyard for ambitious American agencies.
Edelman Public Relations, for example “struck out with our own office,” in the words of president Richard Edelman. The agency then brought a local firm and “lost real dollars.” Edelman says he talked with another local firm last year, but the price wasn’t right, and the agency has no plans to get back into the Japanese market in the immediate future.
Hill & Knowlton, meanwhile, has been in Japan for 30 years, but chief executive Howard Paster says it is only in the past three or four years that the firm’s Tokyo office has been profitable. “We stayed in the market because Japan is such an important world market. So many of our international clients want to be represented in Japan.”
Others can’t resist the temptation, however. Last year, Cordiant spent $10 million to acquire 92 percent of International Business Information, a financial communications specialist that will partner with Cordiant’s Financial Dynamics and Morgen-Walke & Associates to handle transactions and other IR programs in the world’s major financial centers. And this week, WPP Group’s Ogilvy Public Relations Worldwide snapped up 28 percent of PRAP, one of the market’s three largest PR firms.        
Matt Anderson, president of the Asia-Pacific region for Ogilvy, says he spoke with more than 20 firms and with several people on the client side, before electing to partner with PRAP.
“The market is divided into three broad segments,” says Anderson. “The first is the foreign firms. Most of them have between 30 or 40 people, and 80 or 90 percent of their work comes from global clients. They don’t have a lot of Japanese clients, and they are not particularly deeply rooted in the Japanese business culture.
“Then there are the smaller Japanese firms, which tend to be controlled by advertising agencies. So much   of the public relations budget in Japan is controlled by the advertising agencies, and often they are the ones who tell the PR agencies what to do. So many of these small PR firms do publicity and special events, and almost never get to see the client directly.
“And then there are three or four large Japanese firms that have as many as 150 or 200 people and do the same kind of work the global firms do.”
Of these large Japanese firms, Anderson says, PRAP was unique because of its international perspective. “PRAP stood out as more progressive than the others,” he says. “A lot of its people have experience working outside the United States, and they work equally well with Japanese businesses and with international businesses. It’s also been looking to expand globally, starting a Chinese subsidiary to represent Japanese companies there.”
Much of PRAP’s culture can be attributed to Satoshi Sugita, who has worked in the west and who opened the Japanese office of Burson-Marsteller. “He’s one of the pioneers of public relations in Japan,” says Anderson. “He’s the Harold Burson of Japan.” It was Sugita who led PRAP into the Chinese market—expected to present a major opportunity for Japanese companies—in 1997, a move other Japanese PR firms have since followed.
But the market leader is Dentsu PR, the public relations subsidiary of Dentsu Advertising, the world’s fourth largest advertising holding company and its largest advertising brand. Dentsu owns 20 percent of bcom3, parent company of Manning Selvage & Lee, and MS&L has a partnership with the PR subsidiary.
“Having a credible resource in Tokyo is critical to success in Asia, and we’re pleased to be associated with the leader in the market,” says MS&L chief executive Lou Capozzi, who acknowledges: “Most of the large multinational firms have struggled with Japan. It is difficult because the relationship between public relations and the media is different in Japan, and because the profession there is very inwardly focused.”
Other western PR executives make similar observations, viewing the Japanese PR markets as surprisingly unsophisticated considering the size of the Japanese economy.
“Public relations in Japan is very passive, very reactive,” says Harris Diamond, president of Weber Shandwick Worldwide, which has the largest Japanese presence of any U.S.-based agency. But like so many of his peers, Diamond believes the market is growing in maturity. “I think there is a growing recognition of the importance of communications, of corporate branding, of the importance of corporate governance as Japanese companies begin to pay more attention to their shareholders.”
“We get more revenue in Hong Kong, which is a much smaller market, than we do in Japan,” says H&K’s Paster. “We do almost as much business in Singapore. So yes, the market in Japan seems smaller than it ought to be for such a sophisticated economy. One reason, obviously, is that the economy has been in a 10-year decline, but it’s also a question of the value that’s placed on high-end services. The business value of what we do is less well understood in Japan than it is in other markets.”
There is some evidence that Japanese attitudes toward public relations are changing, however. In 1987, a survey of members of the Public Relations Society of Japan and the Tokyo Advertisers Association found that the public relations activity most cited by practitioners was “advertising.” Another study, published in the Journal of Communication Management in 1999 found that the greatest emphasis was on media relations, most often conducted by cultivating friendships with journalists in the country’s thriving press-club system.
But in a study published in December’s Public Relations Review, University of Georgia professor Lynne Sallot and practitioner David Watson found significant changes. While media relations was named as the most often-performed duty by 65 percent of respondents, other activities included special events, dealing with public inquiries and complaints, and research. Respondents were also asked which of three functions—advertising, marketing, or journalism—their profession most resembled, with 52 percent selecting journalism, while 24 percent who selected marketing and just 2 percent selected advertising.
Perhaps more significant, 55 percent of respondents indicated that their job was considered a management position, compared to just 32 percent who felt their job was of a technical nature. The authors’ conclusion: “Management styles in Japan are by no means a static system unaffected by environmental change…. Public relations professionals in Japanese are more or less like professionals in western organizations in the way they practice public relations.”
Still, most of the U.S. firms in Tokyo have found it easier to focus on international companies than on indigenous Japanese business.
“Foreign clients are easier to handle since there is a greater understanding of the role of public relations, and outside counsel,” says Rich Jernstedt, chief executive of Golin/Harris. “Japanese firms are seen to be more likely to conduct communications—especially strategic, high level work—internally. There is a tendency not to disclose management-level information to outsiders.”
Golin/Harris has around 20 people in Tokyo, and revenue of around $2.7 million, and Jernstedt says there has been “no real growth” over the last two years.
The experience at Hill & Knowlton has been similar. “We work for very few Japanese companies,” says Paster. “When Japanese companies choose to use an agency, they are more comfortable with Japanese agencies. We work mostly with the Japanese offices of European and U.S. companies.” The firm handled the Japanese launch of Tylenol for Johnson & Johnson, for example.
“The concept of brand in Japan is very different from the U.S.,” says Anderson. “But PRAP has worked for some major brands like Nike and Pfizer and it has figured out how to make the connection between those brands and Japanese consumers.” The firm also has a reputation for its work in the crisis management arena, which is important, Anderson says. “A lot of the marketing functions are devalued in Japan, and if you focus on marketing you often don’t get to the highest levels of the company.”
Meanwhile, the mix of business for most U.S. firms remains dominated by relatively low-margin work—media relations and marketing communications support.
“We have done a lot of consumer and marketing communications work in Japan,” says Paster. “And there’s more financial work as international companies increase their investment in Japan. There is less of the corporate counseling, reputation management kind of work that we find in the more mature public relations markets.”
The lengthy Japanese recession clearly plays a part. In September of last year, numbers for the April to June quarter indicated that the economy was contracting at an annualized rate of 4 percent, and the Nikkei stock index hit a 17-year low. Even more troubling to many Japanese, employment hit a postwar high of 5 percent. The economy is saddled with excess capacity and huge debt.
But most believe the economy will eventually turn around.
“The world’s second largest economy can’t be ignored,” says Jernstedt. “Though the economy now is way, way off, it will come back. The opportunity to counsel Japanese companies on their entry to international markets, and the work with international companies anxious to penetrate the Japanese market suggest strong potential.”
There are issues unrelated to the economy however. Several overseas firms complain that the PR economy is artificially depressed by the fact that the market leader, Dentsu, views public relations much the way ad agencies in the U.S. did a decade or so ago.
“Dentsu more or less gives away public relations service to keep its advertising clients happy,” says the president of one international PR firm. “That tends to devalue PR and it reduced it to publicity and media relations. So many Japanese clients don’t view PR as a free-standing discipline, but as something to complement their advertising efforts.”
International public relations firms have made their share of mistakes in Japan, however. Probably the most egregious was believing they could build a credible presence in the market while relying on westerners to manage their offices. One of the reasons for H&K’s historical difficulties in Japan, Paster says, is that the firm relied on expatriates to manage the business there. Paster changed that, and today a Japanese woman, Kuniko Okuwaki, manages the office.
Harris Diamond agrees. “One of the reasons for our success is that our office is headed by local people who grew up in that environment, coupled with people who have experience in the international environment. What we try to do is every market is have about 70 percent of our people local and 30 percent international. That way, you get the best of both worlds.”
Clearly, international public relations firms are learning, and there’s considerable optimism that as Japan enacts economic reforms, the market will pick up.
“There’s a correlation between the liberalization of markets and the opportunities we have to offer high-value services,” says Paster. “Even though Japan is a market economy, it’s not a particularly liberal economy. It’s more dependent on historic relationships than on public communications.”
One encouraging sign of liberalization is the increase in foreign investment. In 2000, more than $30 billion of outside investment flowed into Japan, with U.S. companies leading the way. And about 20 percent of the market capitalization of the Tokyo Stock Exchange is now controlled by foreign money, and the market has become more liquid as the cross-shareholding agreements between Japanese companies have begun to fracture.
If things go the way many observers predict, the Japanese market could still be huge.
“It’s amazing that the public relations industry has grown as large as it has without really tapping into the Japanese market,” says Anderson. “The Japanese market has the potential to be several times larger than it is today, and we definitely want to be part of that.”
The Public Relations Society of Japan has about 130 member firms. The following are the largest, according to the Almanac of Advertising-Related Firms. Because different firms appear to count revenues differently, the firms are ranked by the number of employees in PR. Names in brackets represent U.S. affiliates.
1. Dentsu Public Relations  (MS&L) --  222
2. Kyodo Public Relations -- 156
3. PRAP Japan (Ogilvy PR) --  154
4. Ozma PR --  93
5. Full House -- 92
6. Weber Shandwick Worldwide -- 70
7. Sun Creative Publicity -- 41
8. Cosmo Public Relations --  36
9. Burson-Marsteller -- 35
     Fleishman-Hillard -- 35
11. Inoue PR -- 32
12. Hill & Knowlton -- 30
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