Who will stop Japan’s vested interests from stomping on reform and productivity growth?

Who will Stop Vested Interests from Stomping?

Japan needs to introduce structural reform if it is to boost its moribund economy. Indeed, Prime Minister Shinzo Abe made structural reform one of three policy arrows in an attempt to stimulate productivity growth. Genri Goto however, didn’t wait for top-down political change. Instead, he engaged in a David and Goliath upward battle to achieve structural reform from within.

Taking on bureaucrats and special interest groups, Goto successfully sued Japan’s Ministry of Health, Labor and Welfare in Supreme Court over legislation designed to protect incumbents from entrepreneurial new market entrants. On 5 June 2013, the Abe administration underpinned the Supreme Court judgment by announcing that it would allow on-line sales of all OTC drugs by firms like Kenko.com.

Kenko.com is an on-line pharmacy, and Goto its CEO and founder. This is the story of how one man successfully took on pharma’s vested interests and the bureaucrats whose pockets they lined.

Genri Goto was born in Kyushu. His family ran a small 90-year-old pharmaceutical manufacturing business in what was a traditional, mature industry. After graduating from The University of Tokyo in 1989, Goto was offered the opportunity to take over the family business. However, he wanted to follow a more exciting path. For the same reason Goto did not wish to work for a big traditional Japanese company, a route chosen by most of his classmates. Were he to go down that path, it would take decades to climb up the corporate ladder.

Instead, Goto took a job at Accenture, an information technology consultancy. Consulting offered Goto a quick path to the top. Those who joined a top consultancy could find themselves advising top executives at Japan’s leading companies within 3 – 5 years. From within Accenture’s strategy division, Goto supported big Japanese companies in their attempt to transition into the information age.

It was a huge uphill battle. Japan’s economic bubble had recently burst. High-quality products produced by big Japanese firms had become mere commodities. Big firms were slow to recognize that software had eclipsed hardware as the means to achieve product differentiation and competitive advantage. The organizational structure, culture and mind-set of big companies employing hundreds of thousands of people also prevented swift enterprise level transformation.

Frustrated with the slow pace of change, Goto made the leap executives at big Japanese companies typically only dream about. In 1994 he started Healthy-Net, a firm which sold dietary supplements manufactured by his family’s business. Healthy-Net sold product by direct-mail using the latest software and technology.

By 1999, sales at Healthy-Net grew to ¥300 million ($2.7 million). One year later, convinced e-commerce would dramatically change the nature of distribution, Goto altered Healthy-Net’s business model from direct-mail to e-commerce. The move would dramatically cut the company’s costs, which could then be passed onto consumers.

Goto put together a management team, raised venture capital and renamed his e-commerce company Kenko.com. He diversified the company’s product line, sourcing them from many vendors. It was a struggle at first, but by 2011 Kenko.com’s sales had exceeded ¥17 billion ($156 million).

The bombshell hit in 2006 when the Ministry of Health amended an old law that, if put into effect, would ban on-line sales of most over-the-counter (OTC) drugs. Under the amended law, aspirin, herbal medicines, pregnancy tests and riskier products were banned from on-line sale. As a result, Kenko.com stood to lose 75% of its OTC drug sales.

The trouble began in 1990s with the emergence of chain drugstores in Japan. At the time, customers complained they could not get reliable information on OTC drugs sold in chain drugstores. This often occurred as there were no pharmacists actively working within branches. So consumers complained to the Ministry of Health.

Technically, chain drugstores were acting within the letter of the law. Under the Pharmaceutical Affairs Law of 1960, a law which had remained unchanged in 46 years, chain drugstores did not need to employ pharmacists directly interacting with customers in their outlets. Written in a bygone era when pharmacies were independently owned and operated and customers routinely received face-to-face advice from a pharmacist, the law was hopelessly outdated.

So, the Ministry of Health pressured the chains to hire an active pharmacist for each branch. The chain stores objected through their representative body, the Japan Association of Chain Drug Stores (JACDS). JACDS said if their constituents were forced to do so, they would sue the Ministry of Health.

Temperatures boiled when Don Quixote, an innovative Japanese chain store with branches open 24/7, jumped into the fray. In 2000, Don Quixote introduced a video system whereby customers could have virtual face-to-face contact with a pharmacist.

Chain drugstores loved the idea. They saw it as a cost-effective way to satisfy concerns. But the Pharmacist Association, a powerful vested interest group which represents independent pharmacists across Japan, were up in arms over the move. If Don Quixote was allowed to continue the practice, they argued, many independent pharmacies would be forced to close.

A new solution was found which formed the basis of the amended Pharmaceutical Affairs Law of 2006. Under the amended law, OTC drugs fell into one of three newly established categories:

For those falling into the least risk Category Three, no product information needed to be given to customers. Those falling in highest risk Category One required that written information be provided by a licensed pharmacist.

OTC drugs falling into mid-risk Category Two required that information be provided on a ‘best effort’ basis by a licensed pharmacist or by a registered retail person. The latter was a newly established category whose registration could be obtained by working at a pharmacy for only a year or more.

The amended Pharmaceutical Affairs Law was passed in 2006 but was not to become effective until 2009. Crucially, the amended law did not stipulate details about how information was to be delivered. That was to be determined by an ordinance drafted in the interim period.

Goto explained to Beacon Reports how vested interests colluded with bureaucrats to draft the ordinance:

In February 2008, the Ministry of Health created a research panel to draft the ordinance. Only JACDS, the Pharmacist Association and representatives of other old economy businesses gathered at the round table. On-line drugstores were not invited to participate.

Independent pharmacists were represented because they gave money to the politicians through the Pharmacist Association (which has chapters at all levels − prefectural, city and town). The chain stores were represented as they were orchestrating the creation of the ordinance through JACDS.

Most people in this industry believe that the ordinance was written by the chairman of JACDS. He boasted about that. It was he that initiated the creation of the new license covering registered retail persons.

The JACDS had to take into account the interests of the independent pharmacists, but the voice of the new Internet economy was muted. The JACDS shook hands with the Pharmacist Association and the Ministry of Health.

The ordinance required that written information be delivered face-to-face, even for aspirin. Independents, drugstore chains and convenience stores could continue to sell OTC drugs from 2009 onwards provided staff held the right license or registration.

The ordinance effectively banned the on-line sale of most OTC drugs, protecting incumbents from new and disruptive market entrants, like Kenko.com. “They were − they still are − defending their own narrow interests, at the expense of Japanese consumers and the nation’s long term-economic health,” said Goto.

As is standard practice, the Ministry of Health announced the terms of the ordinance in September 2008 and subsequently gathered public comment. Most of the 10,000 comments received were against the ordinance. Kenko.com, Rakuten and Yahoo! also collected another combined 1.5 million on-line signatures against the ordinance. This action was to no avail.

Just before the amended law and new ordinance became effective in June 2009, Kenko.com sued the Ministry of Health. Kenko.com lost the initial case when the Tokyo District Court rejected their suit in April 2010. Kenko appealed. Two years later, they won the case when the Appeal Court overturned the verdict. The Ministry of Health appealed and the case went to the Supreme Court.

On January 11th, the Supreme Court unanimously ruled in Kenko.com’s favor. Finally on June 5th, the Abe administration announced that it would allow the on-line sales of all OTC drugs as part of its growth strategy. This was a clear win for the interests of the Japanese consumer and a personal victory for Goto who fought a lonely battle for regulatory reform.

Beacon Reports asked Goto what he learned about fighting bureaucracy in Japan. He replied: “I graduated from university in 1989 when Japan was number one. In the 1990s the old legacy bureaucrats were still in power. I think that led to Japan’s 20 years of economic hardship. That’s a huge obstacle for the revamping of Japan.”

He further commented, “On-line OTC sales is an issue I know well. I want to change the momentum of Japan’s struggle, but I can’t do it all by myself. Within my sector, I’m doing what I can by breaking the old legacies. The judgment I got will positively influence future generations all over Japan.”

Beacon Reports wholeheartedly agrees and hopes Goto’s efforts are repeated by others across Japan in industries and sectors that remain in need of reform.

Genri GotoGenri Goto, Founder and CEO of Kenko.com, Inc.  kenko.com

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