In 2018, the Ministry of Economy, Trade and Industry (METI) published the results of an investigation into Japan’s digital infrastructure, commonly known as the ‘DX Report’. The conclusion was stark. Japanese companies must invest in new digital technologies and develop innovative business models before 2025 or face major economic losses. The so-called “2025 Digital Cliff”.
The Japanese IT landscape is unusual amongst global developed economies. The average Japanese firm sees IT as a problem to be solved rather than a strategic opportunity. Analysts suggest IT team members are near the bottom of the corporate food chain, responding to directives “thrown over the proverbial wall for IT to execute”.
The METI report calls out this problem directly, albeit in more diplomatic language: “Top executives may not strongly support DX, so the company may lack the drive to implement it”.
This apathy towards digital capability filters across the economy. Firms are heavily reliant on external service providers and they retain minimal in-house capabilities. Japanese firms scrape by on highly customised legacy systems that have become the digital equivalent of threadbare . The IT service providers propping it all up shows symptoms of this sickness. Many focus on maintaining traditional accounts, with little appetite for investing in new technologies that their customers are unlikely to purchase.
It is rare that such wide-scale systemic issues come with a time limit. Aside from Y2K, the economy is used to vague, existential challenges with unspecified points of no return (think the climate crisis or spiralling government debt).
METI have identified a cliff edge in 2025 that Japanese companies will plummet off if they do not take serious evasive action – and there will be no safety net to catch them as they fall.
It is rare that such wide-scale systemic issues come with a time limit.
Currently, 20% of mission critical systems are older than 20 years, which will increase to 60% by 2025. In 2015, there was a lack of 170,000 IT specialists in Japan. By 2025, this gap will increase to 430,000. The combined effect of these shortfalls will be an economic loss of up to 12 trillion yen per year after 2025 (2% of GDP).
If that is not enough to shock the economy into action, there is another milestone (or perhaps a jagged rock) waiting for Japanese firms at the base of the cliff. SAP, the number one market share ERP in Japan, will cease the mainstream maintenance for SAP Business Suite 7 core applications at the end of 2027, with optional extended maintenance until the end of 2030.
Something must change… and fast.
In the 22 months since METI published this stark warning, we at Asset Value Investors (AVI) have witnessed the IT service sector begin to respond to the call to arms. Market leading players such as NTT Data and Fujitsu Software are reporting 5-year sales growth exceeding 50%.
Significant research into new product areas such as cloud-based technologies, and innovation first mindsets are driving the sector forward. Coupled with significant and sustained increases in EBIT margins amongst system integrators, a picture is clarifying of growing demand for digital services that are being delivered with greater efficiency.
As an investment firm looking to unlock value in high-quality Japanese businesses, AVI has kept a keen eye on this mobilization and we see significant opportunities emerging.
Much like the California gold-rush, where savvy entrepreneurs made their fortunes providing tools and supplies for the prospectors, it is those providing services that stand to gain from Japan’s rush to digitise. Japanese IT service delivery companies are well placed to cash in from the inevitable tidal wave of demand for IT transformation.
DTS is just one of these organisations. The systems integration and “comprehensive information services company” occupy a niche position in the IT service delivery market, serving up high growth and high profitability. There is, however, scope for unlocking greater value in their business. At AVI, we seek out investment opportunities with identifiable catalysts for long-term value – as we discussed in a previous Insight.
The company has an exciting future but its balance sheet efficiency, governance standards and current strategy need vital improvement. Despite achieving a 5-year EBIT CAGR of 11%, DTS trades on only a 5.6x EV/EBIT compared to best-in-class peers on 20x.
DTS is a prime example of a firm that should be looking to soar from the digital cliff, taking the rest of the Japanese economy with them. Living up to their slogan ‘Delivering Tomorrow’s Solutions’ will require abandoning traditional Japanese risk aversion and refocusing their strategy to embrace high growth products.
Even in the context of Covid-19, the risks of withdrawing to safe, predictable products and stable accounts are significant. It is perhaps a bitter pill to swallow for some Japanese firms that the status quo is now far more precarious than change.
METI have made it clear that investment in digital infrastructure is essential. They are warning Japanese firms that they must evolve or face the consequences. Japanese firms have traditionally remained stoic in the face of external pressure. From our experience working with Teikoku Sen-I, Fujitec and other large Japanese firms, we are well aware of the careful, strategic engagement required to spur change. The digital revolution that METI are crying out for is entirely dependent on traditional Japanese business practices evolving across the economy. The message is clear: the digital cliff is coming, so either fly or fall.
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AVI Global Trust – General Risk Factors
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AVI is authorised and regulated by the Financial Conduct Authority of the United Kingdom (the “FCA”) and is a registered investment adviser with the Securities and Exchange Commission of the United States. While the Investment Manager is registered with the SEC as an investment adviser, it does not comply with the Advisers Act with regard to its non-U.S. clients.
Intended Audience
The information on this website is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced on this website.The information on this website is subject to change without notice.
This website is primarily intended for UK residents. It is not intended for distribution to, or use by, any U.S. persons or persons in any other country where such distribution or use would be contrary to local law or regulation.
It is your responsibility to observe all applicable laws and regulations of any relevant jurisdiction.
No Tax or Legal Advice
Nothing on this website constitutes investment, legal, tax or other advice nor should it be relied upon in making an investment decision.
Money Laundering
As a result of money laundering regulations, additional documentation for identification purposes may be required when you make your investment. Full details are contained in the relevant subscription documents.
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As with all financial or investment matters, you should exercise great care in using the information provided on this website or available through links from this website. You should research the facts, opinions and strategies mentioned in this website before making any financial investment decisions. If you are unsure about the meaning of any information provided please consult your financial adviser or other professional adviser.
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Whilst all reasonable care has been taken in the preparation of this website, AVI cannot guarantee the accuracy or completeness of such information, either expressly or implied. Neither AVI, any of its directors, officers or employees, nor any third party vendor, will be liable or have any responsibility of any kind for any loss or damage that you incur in the event of any failure or interruption of this site, or resulting from the act or omission of any other party involved in making this site or the data contained therein available to you, or from any other cause relating to your access to, inability to access, or use of the site or these materials, whether or not the circumstances giving rise to such cause may have been within the control of AVI, or of any vendor providing software or services support.
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In no event shall AVI be liable to any indirect, incidental, special or consequential damages arising out of or in connection with the use of this website, the inability to use this site or any products or services obtained or stored in or from this website, whether based on contract, tort, strict liability or otherwise. These limitations also apply to any third party claims against users.
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Everything on this website is the valuable intellectual property of Asset Value Investors Limited, or their respective suppliers. We protect our intellectual property rights to the full extent of the law.
Copyright Policy
No permission is granted to copy, distribute, modify, post or frame any text, graphics, video, audio, software code, or user interface design or logos.
Hyperlinks
The existence of hyperlinks should not be construed as an endorsement, approval or verification by AVI of any content available on third party sites. By providing access to other websites, we are not recommending the purchase or sale of products or services provided by the website’s sponsoring organization. We do not review any of these third party sites. AVI reserves the right to require written consent for, or request the removal of, any links to our website.
AVI disclaims all responsibility for the content of third party sites
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For your protection, we require the use of encryption technologies for certain types of communications conducted through this website. While we provide those technologies and use other reasonable precautions to protect confidential information and provide suitable security, we do not guarantee or warrant that information transmitted through the Internet is secure, or that such transmissions will be free from delay, interruption, interception or error.
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We encourage you to read AVI’s Privacy Policy which can be obtained by clicking the Privacy Policy button found on the Homepage.
General Terms
Deliberate misuse of any element of this website including, without limitation, hacking, introduction of viruses or similar code, disruption or excessive use or any use in contravention of applicable law, is expressly prohibited and we reserve the right to terminate your access to the website, and at our discretion, pass information to the legal authorities.
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AVI Global Trust – General Risk Factors
AVI Global Trust plc is a public company listed and traded on the London Stock Exchange.
Past performance should not be seen as an indication of future performance. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. The trust uses gearing techniques (leverage) which will exaggerate market movements both down and up which could mean sudden and large falls in market value. Please refer to the Key Features Document for further details effecting affecting your investment.
Applications to invest in AV Global Trust referred to on this Site, must only be made on the basis of the current Key Features Document, or other applicable terms and conditions. Past performance should not be seen as an indication of future performance. Market and exchange rate movements may cause the value of a fund to rise or fall and an investor may not get back the amount invested.
As a result of money laundering regulations, additional documentation for identification purposes may be required when you make your investment. Details are contained in the relevant application documents. If you are unsure about the meaning of any information provided please consult your financial adviser or other professional adviser.
By agreeing to these terms, you agree that we may contact you by post, fax, email, SMS messaging or by other forms of electronic media to inform you of our products and services that we believe you might be interested in.
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