Connecting CommerceBusiness confidence in Japan’s digital environmentA report from The Economist Intelligence Unit

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Japan

In comparative studies of the world’s major cities, Tokyo often fares well. For example, it ranks fourth out of 84 cities in the 2014 Global Cities Index, produced by the consultancy AT Kearney.1 Another study, Global Cities of the Future 2014/15, produced by the Financial Times, places the Japanese capital third amongst 24 “mega-cities”.2 Both of these are comparisons across a broad range of attributes, such as economic potential, business friendliness, connectivity and liveability. Tokyo is the global leader, meanwhile, in a 2017 Economist Intelligence Unit ranking of the world’s safest cities (60 are included).3

However, when it comes to expectations of the environment for digital transformation—a gauge of the availability of local support companies receive in their efforts to advance digitisation—Tokyo fares considerably less well. Business confidence in the

digital environment is lower here than in all but two of 45 cities in the Digital Cities Barometer. One of the latter is neighbouring Yokohama (44th), while Osaka fares slightly better at 38th.

Japan’s weaknesses in digital transformation are apparent to Gakuse Hoshina, who is managing director of the Accenture Digital Hub in Tokyo, an innovation centre established in 2016 by the global consulting firm. The country, he says, needs to do more to develop an environment that encourages digital entrepreneurs and innovation. Tokyo itself, says Mr Hoshina, has not built an ecosystem that would provide the kind of support needed for small innovative firms as well as larger ones pursuing digital projects.

According to the survey, respondents from all three Japanese cities cite limited funding for investment, as well

as talent and skills shortages as the toughest challenges their businesses face in pursuing digital transformation. Mr Hoshina agrees that these are difficulties, but he sees internal issues within existing businesses as the bigger obstacle to transformation. “It’s not just the walls separating different companies,” he says. “It is the colossal walls within companies. These walls separate corporate and business departments into siloes. This is especially true of big established companies, which are slow moving and highly risk averse. In the digital world, it is not about making a perfect five-year plan and executing it, but about taking incremental steps and trials much more frequently. It’s more important to score a 70 out of 100 today than to aim to score 100 in five years’ time.”

5.69 43rd

5.95 38th

5.61 44th

Tokyo

Osaka

Yokohama

Score (out of 10) Rank (out of 45)

1 AT Kearney, Global Cities Present and Future: 2014 Global Cities Index and Emerging Cities Outlook, 2014. 2 fDi Intelligence (a Financial Times company), Global Cities of the Future 2014/15: Winners, 2015. 3 Economist Intelligence Unit, Safe Cities Index 2017: Security in a rapidly urbanising world, 2017.

43%

38%

39%Limited funding for investment

43%

33%

34%Talent/skills shortages

15%

10%

17%

Inadequate ICTinfrastructure

TokyoOsakaYokohama

Figure 1: Overall barometer readings—Japanese cities Figure 2: The toughest challenges organisations face in pursuing their digital transformation initiatives

2 Telstra — Connecting Commerce © The Economist Intelligence Unit Limited 2017 3

Educating the digital workforceJapanese executives provide middle-of-the-range scores for the component of the barometer focusing on people and skills (in Tokyo, 5.16 on a 1-10 scale; in Yokohama, 5.11; and in Osaka, 5.89). Here, too, however, Tokyo’s and Yokohama’s scores are the lowest of the 45 cities in the study. Respondents are slightly more positive when it comes to their educational institutions’ capacity to equip students with the digital skills businesses need. In both Tokyo and Osaka, for example, 53% of executives say their institutions are effective in this area.

Mr Hoshina believes the education system in Japan is not yet fit for the digital age. “The right talent to push forward digital transformation is not easily found in Japan. The traditional education system itself—as you can imagine from the way professors teach at Japanese universities—is not cut out for this. A one-way lecture of professors dictating to students—this does not push students to think proactively.” Mr Hoshina believes, meanwhile, that young people’s computer programming skills need to improve, through active learning methods, for example. The government’s decision to make coding a compulsory subject in the nation’s elementary schools from 2020 is a step forward,4 but he adds that the way the topic is taught will also need to be changed.

In all three cities, expertise in security tops the list of skills most needed by companies to support their digital transformation. This tallies with the survey results from several other

cities in the study, in which executives emphasise both their concerns with the cyber security threats facing their businesses and their sense that the skill requirements for security specialists are changing rapidly. Other digital skills in high demand by Japanese companies are in the areas of business networks, product/service offering (involving, for example, the configuration, pricing and marketing of digital products) and big data analytics.

4 “Computer programming seen as key to Japan’s place in ‘fourth industrial revolution’”, The Japan Times, June 10, 2016.

Supporting innovationOne key role played by a city’s digital ecosystem is to provide different types of support to start-ups and other innovators. Another is to bring these entrepreneurs together with large firms to facilitate idea-sharing and collaborative innovation. On both counts, the ecosystems of all three Japanese cities in the study are relatively undeveloped in comparison with those of other cities in Asia, Europe and North America. Tokyo, for example, does not get a mention in other global studies of entrepreneurial hubs, such as the Global Startup Ecosystem Ranking, produced annually by Startup Genome.

Some aspects of the ecosystem in Tokyo and other Japanese cities are beginning to change, however. The formation of start-ups is reportedly gaining momentum,

for example, in fields such as medical technology, the Internet of Things and artificial intelligence.5 Venture capital investment—from independent as well as corporate funds—is also on the rise.6

The networks of accelerators, incubators, innovation labs and informal communities of technology entrepreneurs that are so instrumental in the ecosystems of San Francisco, London and New York, amongst others, are in the early stages of development in Japan’s cities. Even so, businesses in Osaka already find accelerators and incubators more helpful than other support structures, according to the survey respondents there. More traditional forums and structures such as industry conferences and business associations are the favoured sources

of digital ideas and advice in Tokyo and Yokohama.

This landscape is beginning to change, however. In Tokyo and Osaka, the number of accelerators, incubators and co-working spaces designed for tech entrepreneurs is growing (including one incubator situated inside an Osaka shopping mall7). Innovation labs are also being established, several by corporates. The Accenture Digital Hub is part of this expanding landscape in Tokyo, bringing various companies, technologies and ideas together,” according to Mr Hoshina (see page six “Digital help for conservative corporates and an ageing population”).

5 “Japan Is Finally Embracing Startups”, Reuters, December 28, 2016. 6 “Japanese venture capital blooms but lacks specialization compared to the US”, TechinAsia, September 28, 2017. 7 “Japan’s Silicon Valley? Osaka hopes hi-tech startups will reverse economic woes”, The Guardian, March 31st, 2016.

Figure 4: The most helpful external groups in assisting firms’ digital transformation efforts

Osaka

Yokohama

Tokyo

Industry conferences

Innovation labs and centres

31% 25% 17% 15%

10% 25% 35% 23%

30% 20% 18% 25%

Business associations and events

Incubators/accelerators

Figure 3: Share of respondents deeming their city’s educational institutions as effective at equipping people with the right digital skills

20%

32%

23%

30%

13%

30%

Osaka

Yokohama

Tokyo

Very effective Generally effective

4 Telstra — Connecting Commerce © The Economist Intelligence Unit Limited 2017 5

Japanese business leaders are fully aware of the need to collaborate more widely with entrepreneurs and innovators, and of the importance of open innovation, according to Mr Hoshina. Large companies are, however, a long way from developing the culture to do this effectively, he says. “Large corporations often do not speak the same language as start-ups.” This is one of the main reasons why Accenture established its Digital Hub in Tokyo, according to Mr Hoshina—to facilitate and increase interaction between its corporate clients and innovative Tokyo start-ups as well as policymakers at both national and city levels. It is part of a network of similar centres the consulting firm is establishing in major centres around the world. (The latest was launched in September 2017 in Singapore.)

The Tokyo hub gathers under its roof start-ups, individual entrepreneurs, university researchers, software developers and other engineers and specialists developing their own product or service ideas. Accenture experts in areas such as analytics, digital marketing, user experience design and security work nearby to provide advice or otherwise share ideas with the innovators. The hub features separate working spaces for “left brain” people—technically oriented engineer types—and workshop space for “right brain” people—creative, often artistic individuals who are also digitally savvy. They all interact with each other but also with executives from larger companies—Accenture clients—who regularly visit or occupy space at the hub.

Amongst the products being tested and prototyped are technologies to assist the elderly, including digital devices to help people suffering from incontinence, dementia and other infirmities. Mr Hoshina believes that the country’s pressing challenge of an ageing population is creating innovation opportunities in which Japanese entrepreneurs can become global leaders. “The rapidly ageing population is a crisis for Japan,” he says. “We have no other choice but to use digital technology to ease some of the difficulties it poses.”

Digital help for conservative corporates and an ageing population

Policy impactsNeither the city nor national governments in Japan have been especially proactive in the past in encouraging the growth of digital ecosystems. The national government is starting to expand its role with programmes designed to encourage the growth of venture capital funding and to boost start-up activity. The survey respondents make clear that they expect their city governments to play a larger role, with two-thirds in both Tokyo and Yokohama stating that the role of city support for digital transformation will expand in importance over the next three years.

Mr Hoshina makes clear, however, that the success or failure of digital transformation will ultimately be determined by internal factors. In particular, he asks, “will business leaders be able to change a prevailing mindset which discourages risk-taking? Better technology and data will be useless to companies without forward-looking leadership and a vision of their digital growth.”

© The Economist Intelligence Unit Limited 2017 76 Telstra — Connecting Commerce