Over the past 20 years, Japanese brands have had a remarkable impact on global culture. The same, unfortunately, cannot be said of the advertising agencies that helped to form them. Behind every Toyota or Sony is a Dentsu or Hakuhodo, but these two massive Japanese agencies - which account for more than 40 per cent of the country's advertising market - have singularly failed to adapt to markets outside Japan. Why?
The reasons are many and varied. In Japan, of course, client conflict is not an issue - and both Dentsu and Hakuhodo each hold several competing brands, thanks to an agency model that offers clients unequalled media buying power. "Once you leave Japan, conflict becomes a huge issue," Andrew Kefford, the chief executive of Results International, says. "In many markets, they have established multiple agencies to have access to conflicting car accounts."
And while their unique models are the source of their power in Japan, other markets have proved considerably less receptive. In Japan, for example, the duo's phenomenal strength can be traced back to their roots as media brokers, and their revenues come largely from media commissions based on buying traditional media in bulk - with TV, print and radio accounting for almost 65 per cent of all Japan's Y5,962.5 billion (£26.6 billion) in adspend in 2005.
But few Japanese creative agencies have a serious media offering outside Japan, a situation exacerbated by the cultural issues that have dogged Dentsu and Hakuhodo's international growth. While Japanese clients may feel more comfortable with a Japanese agency in a foreign market, once the client starts staffing up with locals it becomes natural for accounts to be reviewed according to the realities of the locality - as evidenced by Honda's successful relationship with Wieden & Kennedy, and Toyota's long-term relationship with Saatchi & Saatchi.
Dig deeper, and even more curious factors emerge, as Reg Moses, the Asia chief of the selection consultancy Aprais, explains. When he sold his Australian agency BAM to Dentsu, there were some interesting reasons why the agency's Japanese clients would not retain it in Australia: "We'd have this charade where clients would come in and we'd present, but we'd never get the business."
Moses goes on to claim: "The Australian management at the Japanese companies were just too afraid of Dentsu in Japan. They thought they would be spied on."
Hakuhodo at home
To its sustained chagrin, Hakuhodo is regularly defined against its great rival Dentsu, a comparison that often does Hakuhodo few favours. Because Hakuhodo, in its own right, is a quite remarkable agency - boasting almost 3,000 staff locally and domestic revenues of Y710 billion (£3.1 billion).
The "number-two syndrome", as Kefford calls it, means that Hakuhodo's efforts are often overshadowed by its larger peer. But Hakuhodo has moved to address this imbalance; most notably through its 2002 integration with the agencies Daiko and Yomiko to create the HDY holding company and, subsequently, HDY Media Partners.
The high-profile acquisitions marked a clear sign of Hakuhodo's intention of taking the battle to Dentsu; HDY's combined market share amounts to 16 per cent, compared with Dentsu's 26 per cent. But the results of the merger, albeit at an early stage, have been mixed - with domestic media companies apparently reluctant to hand over bigger rebates to the HDY media operation.
"HDY hasn't really merged - it just set up a holding company to bring more media-buying clout. But it hasn't worked so well, as media companies are not looking so favourably on giving bigger rebates," Robert Fuchs, the chief executive of Carat Japan, explains.
The origins of Hakuhodo's power, meanwhile, are the same media broking roots that propelled Dentsu to domestic dominance. Founded in 1895, Hakuhodo grew its media buying clout primarily in the newspaper sphere before leveraging the rapid growth of radio during the 50s. Originally run by the Seki family, it was the company's third president - Mitchitaka Kondo - who revolutionised Hakuhodo's approach during the 80s, transforming the company around the concept of "marketing engineering".
The 80s, it appears, was quite a decade for Hakuhodo, also giving rise to the agency's embrace of sei-katsu-sha - consumers whose lives revolve around more than shopping - via the formation of the Hakuhodo Institute for Life and Living. This focus on consumer research has give Hakuhodo a clear distinguishing feature in the battle against Dentsu, and has also led to true innovation in the consumer insight field.
"While Dentsu is all about media power, Hakuhodo tries to be a bit more about consumer insight," Dave McCaughan, the head of strategic planning at McCann Erickson Japan, says. "Hakuhodo's image is built more on comparative research."
Hakuhodo is often viewed as being more international in its outlook than its bigger rival, in large part thanks to the earlier formation of joint ventures with McCann Erickson and Lintas Advertising. This development meant Hakuhodo's Asian expansion met with initial success during the 60s and 70s, as it attempted to meet the overseas needs of booming local clients such as Honda, Canon, NEC, Matsu-shita and Toshiba.
But that was then, and the intervening years have brought Hakuhodo considerably less joy outside of its domestic stronghold. Attempts to set up its own agencies in US and European markets have faltered; now the agency's approach appears to be based around buying minority stakes in a limited number of partners in key overseas markets.
Two recent examples of this strategy are the agency's stakes in Mustoes and the Nexus Group in the UK (now being revised). Hakuhodo has also made a series of similar investments in the US, where it has been open about the need to find business models that are grounded in the US market. The approach is hardly unique, but Hakuhodo has recognised that, as its clients continue to localise, cultural demands require a markedly different mentality from the typical Japanese agency.
"Wherever we are in the world, our primary goal is to become a partner to our client, solving their problems and suggesting communication strategies, always in consideration of local history, culture, customs and conventional wisdom," a Hakuhodo spokesman says. "When our domestic clients move into new markets abroad, we strive to solve their global problems in the same way we do in Japan, building on the track-record and relationships of trust that we have built in Japan."
Many observers see culture as the biggest obstacle to Hakuhodo's plans for international success. "Advertising the Western way has become a widespread modus operandi," Kim Walker, the chief executive of M&C Saatchi Asia, says. "The only exceptions are Japan and Korea. When you try to export the culture of those businesses, it's hard to attract good clients and talent."
The most notable recent move Hakuhodo has made in the international arena is its joint venture with TBWA, on the back of a successful relationship servicing the global Nissan business. The Tokyo-based TBWA\Hakuhodo launched in mid-2006, and will also handle TBWA's Japanese client base, including Adidas, Masterfoods and Haagen-Dazs.
The two agencies have also formed a joint venture in China, where Hakuhodo - much like Dentsu - has been focusing a considerable amount of its foreign investment. Indeed, Hakuhodo's foreign activity continues to be skewed towards Asia, where it has developed relatively successful offerings in India and the Asian markets.
"Asia, particularly China, is our key strategic market, and we are proactively developing business in this region," Hakuhodo's spokesman adds. "Our expansion in the region focuses on local independent agencies."
Strength at home: Dentsu
Dentsu's dominance of Japanese business cannot be understated. The company racked up Y1,600 billion (£7.1 billion) in domestic revenues for its 2006 fiscal year, making it not only the largest agency in the world, but also placing it fifth among the world's holding companies.
Accounting for more than a quarter of Japan's advertising billings, Dentsu's fortunes have become inextricably linked with the health of the Japanese economy. Relying heavily on media commissions from traditional channels, with which Dentsu has extremely close relationships, the Japanese powerhouse has felt little buffeting from the winds of change that are assailing "old" media in other parts of the world.
Instead, Dentsu has hedged its investments wisely, buying up a range of new-media and marketing services agencies that offer better growth rates than traditional media. Throw in the fact that it provides most of these services within the media commission at a fraction of cost, and it is becomes easy to see why Dentsu's close links with the established order - and its ability to buy in bulk - have made it the dominant force that it is today.
For boutique start-ups and international creative agencies alike, however, the Dentsu model means that, in the words of Kefford, "specialised services have never been able to get traction". International media agencies, on the other hand, must content themselves with media planning alone, a process that requires them to demonstrate how their tools and services can save clients money on the media buying side.
"Dentsu will do the planning for free," one media agency source says. "Generally, it isn't under scrutiny from clients. But if you can show media spend savings through your planning, then clients may see the value in paying for planning."
Some of these planning assignments - as evidenced by MindShare Japan's recent wins of LVMH and Unilever - can be extremely lucrative, but it is usually only international clients that are willing to split planning and buying. While Kefford admits that quality of work remains a factor in client- retention decisions, Dentsu's control over traditional media often makes hiring it a no-brainer - even if the agency becomes considerably more expensive for smaller clients.
Neither, however, should that detract from the quality of creative work that Dentsu regularly develops, making it a leading presence at global awards shows. The agency is helped by the fact that conflict is not the issue it would be in other markets; not only does Dentsu handle Toyota, Honda, Subaru, Daihatsu and Mercedes, but it also works for Hitachi, Toshiba, Panasonic, Sony and Sharp.
"It is built to take advantage of the way things operate in Japan," Kefford explains, pointing out that Dentsu's client relationships often span decades. The most storied of these is the agency's alliance with Toyota, which dates back to the tenure of Dentsu's mercurial fourth president, Hideo Yoshida - the man who drove Dentsu to meteoric growth during the Japanese boom years of the 60s and 70s.
Today, the 40-year company veteran Tateo Mataki holds the reins, and is widely viewed by insiders as a key figure in some of the agency's most audacious moves - which include bagging the Asian sports-marketing rights to all Fifa events, and launching the first agency-owned digital broadcasting business in Asia. With little room for traditional growth left in Japan, Mataki will know only too well that Dentsu's future expansion, now more than ever, depends on the success of its overseas strategy.
Dentsu's weakness abroad
Let's start with the good news. In Asia, at least, Dentsu's expansion strategy has begun to pay off. The agency's presence in China, via Beijing Dentsu Advertising, ranks as the country's largest in terms of revenue - even if it has been bedevilled in recent times by rumours of staff unrest. And Taiwan also remains a highly regarded operation. But let's not get too carried away: Dentsu's overseas business still pales in comparison with its domestic dominance, generating a paltry 10 per cent of overall revenue for the fiscal year ending March 2006.
"Of course, we are not satisfied with these numbers," Takeshi Mori, Dentsu's executive officer in charge of international business, admits. "One of our strategies is to increase this sequentially from 15 per cent to between 20 per cent and 25 per cent. The Bric (Brazil, Russia, India and China) regions are our focus right now, but Dentsu is also taking on the challenge of the American and European markets, where we have a smaller presence."
In fact, Dentsu's misadventures deserve a whole article to themselves. The agency's costly cquisition of the UK boutique Collett Dickinson Pearce is a case in point. Regarded as one of the UK's most prestigious agencies at the time of its purchase in 1990, CDP is now a ghost of its former self, and was merged with another Dentsu buy - Travis Sully - before being restructured again at the end of 2006. According to sources, a massive lease commitment saw the agency run up a deficit of £10 million before the merger.
Other acquisitions may have fared better, but only marginally so. In Australia, Dentsu bought into BAM and AIS, the creative and media leaders respectively. At BAM, according to the agency founder, Moses, things were good for the first decade, before Dentsu's tangle with Bcom3 effectively led it to give away both of the Australian agencies when Bcom3 was acquired by Publicis.
"Bam merged with D'Arcy, which then folded," Moses recollects. "Basically, Dentsu has decided it doesn't know how to run worldwide businesses. It's decided the best way to expand is through someone else."
This helps explain Dentsu's current strategy, which appears to revolve around taking minority positions in several players - most notably through a 15 per cent stake in Publicis Groupe.
"It is taking stock at the moment - up until a few years ago, it was acquiring business and putting networks into place," Kefford says. "Now it is going in with a minority position. But if you do that, you're at risk because majority shareholders can do things you don't want to do."
Mori, meanwhile, has few illusions about the scale of the challenge Dentsu faces overseas.
"We know it all starts with people," he says. "We know the importance of developing talented people who will make Dentsu a global company."
HOW THEY COMPARE
- At home
Market share: Hakuhodo (11.9 per cent), HDY (16 per cent)
Domestic affiliates: 26
Foreign group companies: 65 offices in 16 countries
Foreign affiliates: 25
Overseas staff: Undisclosed
- At home
Market share: 26 per cent
Domestic group companies: 64
Offices outside Japan: 9
Group companies outside Japan: 71 (24 countries)
Overseas staff: 3,678