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From the glass-walled lobby at Asatsu, the Japanese advertising

group that fought its way to the number three slot this year, the neon

sign on top of Dentsu’s headquarters, the industry leader, shines

brightly in the distance. Between the two buildings, crowds of prim

salarymen and uniformed office ladies weave through the narrow streets,

past advertisements for cigarettes, American movies, and sports cars. On

a hot summer evening, the intensity of the competition is as palpable as

the heat that rises from between the crowds.

It looks like the competition is just warming up in Japan. The world’s

second-largest advertising market has been rocked by a wave of mergers

and foreign entries lately. Asatsu, which last year ousted the Tokyu

agency from the number three slot, has recently purchased Dai-Ichi

Kikaku, the seventh-ranked agency, and tied up with WPP, the

second-biggest marketing group in the world. It had just shed its

alliance with BBDO, the New York-based group. Earlier this summer, I&S,

another leading ad group, agreed a deal with BBDO. And Nippo, a smaller

Japanese agency, just announced a merger with TBWA, the New York group

that is part of Omnicom, the world’s largest advertising group.

Add to this the moves the two giants of the Japanese ad industry, Dentsu

and Hakuhodo, have made to strengthen their position recently, and it is

clear that Japan is in for an epic struggle. How the new pack of foreign

entrants plays its cards will determine the shape of the industry in

years to come.

The rapid series of changes in recent weeks is unprecedented in Japan,

where takeovers and mergers are still rare in the advertising industry.

Since the 70s, the top ten firms have accounted for around 50 per cent

of all ad revenues annually, of which Dentsu and Hakuhodo have

controlled between 30 and 40 per cent.

Their closest competitor, until last year either the Tokyu or Daiko

agencies, rarely took more than a 3 per cent market share. Even today,

Asatsu only commands a mere 3.3 per cent of total revenues.

Smaller advertisers, which were sometimes the subsidiaries of a big

Japanese corporation, hardly made a dent in the market. Nippo, for

example, was a subsidiary of Nissan Motor, the car company, until the

TBWA buyout.

But as Japan’s recession has deepened, and consolidation in the global

advertising industry has picked up pace, pressure is mounting on

Japanese advertisers to link up with a global network. Financial

deregulation has also brought a wave of new multinational companies into

Japan. Advertising groups are seizing the opportunity.

’The only way to survive is to see ourselves in global terms. Japanese

young people think more and more internationally; our clients think of

the world as their audience ... and the only way to become more global

is to make an alliance with a foreign company,’ explains Masao Inagaki,

chairman of Asatsu.

Smaller advertisers, feeling the brunt of the recession most acutely,

have also jumped at the chance to tie-up with a cash-rich foreign

group.

TBWA’s offer to buy a majority stake in Nippo was welcomed by Nissan,

which has been cutting costs recently to improve its balance-sheet

problems.

Nippo, an unlisted company, had revenues of pounds 15 million on

billings of pounds 187 million last year.

The coincidence of these factors has also been convenient for US and

European marketing groups looking for a foothold in the Japanese and

Asian markets. Not only do many of the companies that have tied up share

a common client base - TBWA already does work for Nissan in the US, for

example - but many Japanese advertising groups have a long history of

dealing with foreigners.

Inagaki says he has been talking to WPP’s chairman, Martin Sorrell,

about a tie-up with Asatsu for 15 years. It was only after the end of

the agreement with BBDO, however, that the two began to consider a

merger more seriously.

Ogilvy & Mather and J. Walter Thompson, which have a strong presence in

Japan, are also part of the WPP group. TBWA also has a number of joint

ventures with Hakuhodo overseas, and Dentsu has been linked to the New

York-based Young & Rubicam since 1981.

Michael Greenlees, president of TBWA, said on a recent trip to Tokyo to

announce the alliance with Nippo: ’We have been looking at this for

years. We have gotten to a size where we have got to have a stake in

this market.’

Just getting their foot in the door, however, will not be enough,

analysts warn. The new foreign entrants will have to contend with

Dentsu, as well as the special demands of Japan’s ad business and the

tough economic conditions.

It will be no easy feat. Dentsu, which recorded pounds 6bn in billings

and pounds 838m in net profits last year, is arming itself to defend its

position in the market. Last year, the group commanded a market share of

just under 23 per cent. Although its overseas network is still weak -

overseas sales accounted for only 15.4 per cent of turnover last year -

Dentsu says it aims to expand its foreign operations to 30 per cent of

sales by 2001.

This will give it greater access to big, multinational companies.

The group has begun construction of new, high-tech headquarters in the

Tokyo area, and announced it will float its shares on the Tokyo exchange

in order to ’become one of the greatest world-class agencies,’ according

to Yutaka Narita, Dentsu’s president.

Hakuhodo, Dentsu’s closest rival with pounds 3.1 billion in billings, is

an easier target. Last year, the group took only 11.85 per cent of the

market. Although it will keep its alliance with TBWA, Hakuhodo could

lose out to the new agencies and their foreign partners. ’The foreign

companies entering the market will make inroads into Dentsu and

Hakuhodo. The loss of market share is the biggest threat,’ Paul Smith of

HSBC Securities in Tokyo says.

But their effect on the market will not be immediate, he cautions: ’I do

not think you will see a major impact until they (the agencies with

foreign partners) get a critical mass of 10 per cent market share.

If they are adding a few points a year, in the space of a few years, it

can bring them pretty close; it will exercise the minds of Dentsu and

Hakuhodo.’ Smith estimates that Asatsu will capture a 10 per cent market

share in the next five years.

The foreign entrants will also have to adapt to the peculiarities of the

Japanese market. Unlike in the US or Europe, in Japan agencies are

responsible for both developing advertisements as well as buying the

media space to run them. This has contributed to consolidation in the

market at the expense of smaller advertisers, analysts say. Dentsu, for

example, controls 50 per cent of prime-time television slots because of

its long-standing relationship with television networks, Smith says. The

invoice system is also somewhat opaque: clients are typically not

informed where their money was spent.

But local customs are nothing new to the seasoned veterans that are

entering Japan’s market. They bring links with a global network that

Japanese agencies lack and, in return, they gain unlimited access to

on-the-ground expertise in a growing market. Last year, advertising

revenues grew 3.8 per cent despite a slump in consumer demand, and

industry analysts expect more growth this year.

The new alliances have advantages in economic booms and busts alike.

Foreign executives describe the current recession as an opportunity.

’Our experience in Europe is that sometimes during the worst economic

times, some of the best creative work occurs. The requirement to become

creative becomes greater,’ Keith Smith, chairman of TBWA’s Asia

operations argues.

Without a doubt, it should be an exciting few years for the industry in

Japan. Company executives are whispering about more alliances between

domestic agencies, and another big foreign group is said to be seriously

eyeing the market. The globalisation of Japan’s advertising market has

begun.