How COVID-19 impacts Japan’s digital transformation

Samuel Barbosa - Japanese Fintech sector

How COVID-19 impacts Japan’s digital transformation

For the world, COVID-19 has been a wake-up call. And for Japan, the pandemic has exposed various digital and structural deficiencies across its regulatory and Governmental regime.

These deficiencies were immediately under the spotlight. For example, the lack of digital coherence across different sectors led to enormous confusion over numbers of infected people. This is because information on newly discovered COVID-19 cases were faxed between healthcare bodies and eventually to local Governments. This led to inevitable human errors compromising this vital data.

Japan’s digital transformation is slowly taking place

Japan’s traditional infrastructure means that industry is deeply infiltrated by strict controls by Government entities. All of these delay the fast changes necessary to bring the country into the digital age, and present significant challenges to fully digitising the private sector.

This paralysis has ensured Japan has lagged behind global digital leaders such as China and the US. Without properly understanding the disadvantages of these out-dated regulatory constrictions, there is a higher possibility of failure when trying to transform the private sector.

According to McKinsey, an estimated 70% of the realistic value of digitisation derives from the transformation of existing businesses. The other 30% comes from the creation of new, disruptive start-ups. So, while the world’s media likes to focus on the Unicorns (companies that are worth more than $1 billion within their first ten years of operation), the focus should be on existing companies.

Those Japanese businesses that are beginning their digital transformation late can take advantage of those that came before. By strategically utilising the advantages of being late starters, they can learn from those companies that are now leading digitally. By learning from successful digital transformations, these Japanese companies can catch up quickly.

This window is closing, however. The advantage of starting late will eventually die out as other sectors begin to implement their own digital transformations.

How global lockdown increased the urgent demand for online services

The global lockdowns due to COVID-19 quickly increased the urgent demand for working digital services. Minimising human contact meant that everything needed to be available online, from banking services to food delivery, online entertainment, remote education and working to just about everything else.

More than 50% of these online services grew quickly and reached at least 10% growth or more in the majority of countries. However, in Japan this digital uptake remained at less than 10% growth and its rate of increase was slower than the US, China, European countries, India and South Korea.

These lower rates in Japan sharply highlight the lack of scale and development of digital services by the majority of Japanese companies. In other words, consumer demand was definitely there but the services simply weren’t available.

McKinsey’s research shows that the success rate of digital transformation in Japanese companies is generally lower than traditional reorganisations. Only 16% of digital transformations are successful in that they improve performance and boost capabilities. Within traditional industries such as infrastructure, energy, manufacturing and pharmaceuticals, the digital transformation success rate is even lower between 4% and 11%.

Barriers to digital transformation cited by Japanese executives

According to interviews with more than 2,000 executives across Japanese companies, the barriers to digital transformation are not necessarily technical. Instead, they cite the following:

  • Lack of support from senior management.
  • Lack of usable and trustworthy data.
  • Clashes between conventional and digital technologies.
  • Lack of capital.
  • Lack of IT infrastructure.
  • Lack of technical talent.
  • Lack of understanding of the digital tech needed.
  • Poor commitment to change from executive managers.
  • Entrenched traditional corporate culture that’s resistant to change.

Without doubt, for Japanese companies to make the requisite changes to achieve digital transformation, the senior management must be very committed. This is because the core of the business model needs to change in terms of resource allocation. These are new ways of investing in a company and must occur before an organisation can realistically execute the level of change needed.

We know how vital digital transformation is for Japan’s corporate sector, but whether the commitment is there to make it happen remains to be seen to some extent. According to an Industry 4.0 global survey, two-thirds of Japanese managers don’t feel ready to implement digital. This is markedly different from management sentiment in European countries and the US.

So, while business leaders in Japan recognise that digital is the next level of opportunity for business, they are largely reluctant to make the bold changes necessary to give them the global competitive advantage they need.

Three changes Japanese companies can make

We’ve seen that there are three major obstacles that are holding Japanese companies back from implementing true digital transformation. Here’s a closer look at them:

  1. General lack of tech talent in-house

Typically, Japanese companies tend to outsource IT. This means they have little to no digital talent in-house. However, digital transformation needs more than an IT contractor. Instead, it needs in-house digital talent that covers:

  • Product owners directly responsible for the services and products under development.
  • Agile engineers who develop the products and services.
  • Data scientists who can optimise data use thanks to their advanced analytical skills.
  • Translators who can leverage analytics and data based on the business context.

Without these groups of tech talent working within business units and departments there will be no real change. Their roles are different to the old-school IT professional and it’s important Japanese companies recognise this difference and recruit adequately.

  1. Tenures and age of CEOs

Since 1990, according to Teikoku Databank the average age of a Japanese CEO has risen steadily. In 2020, the average age was 60, compared with the average age in the US at 46.8. Initiating a digital transformation after so many years of doing things a different way is a challenge. A CEO would have to be very committed, open to learning about totally new tech and open minded about digital transformation. When the CEO’s close management team is also in the same age bracket, there is little doubt that this can be a disadvantage.

  1. Old-fashioned organisational culture

While Japanese companies are changing and becoming much more diverse, it’s still relatively seldom that external talent joins a business. In other words, seniority and length of service tends to still rule. This can lead to a collective lack of digital literacy and a certain level of resistance to change. Again, this needs a strong, forward-thinking, digitally literate management to ensure that the company doesn’t miss its opportunity.

In summary, the pandemic is pushing the need for rapid and drastic change among Japanese corporations. It’s time to seize the opportunity to make digital transformation happen now in order to eb able to compete during the post-pandemic new normal.

Digital transformation is now accelerating across all industries, and individual corporation’s survival will depend on how fast they can catch up. Rapidly promoting digital transformation in Japan is absolutely critical, as is the fast expansion of e-commerce and omnichannel services.