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[Market Eye] SoftBank-backed Naver, Coupang sparkle in Japan

Young Korean tech firms seek to spur IT innovation in Japan, once considered an impregnable market for chaebol

Feb. 13, 2022 - 16:25 By Lee Ji-yoon
Naver’s founder and global investment officer Lee Hae-jin, SoftBank’s founder Masayoshi Son, and Coupang’s founder Kim Bom
Japan has long remained an untapped market for Korean firms, where even the likes of Samsung Electronics and Hyundai Motor have almost no presence. Currently, Samsung, the world’s largest smartphone maker, has a tiny 5 percent market share there.

Not to mention the soured relationship between Seoul and Tokyo over wartime history and trade disputes in recent years. Japanese consumers have remained loyal to local brands such as Sony and Toyota that compete head-on with their Korean rivals in all sectors globally.

But a wind of change is blowing in the so-called “impregnable market,” as some Korean firms are making inroads into the country’s burgeoning IT services sector where there are few local alternatives.

Naver and Coupang, among others, are the front-runners, with the strong backing from Japan’s tech giant SoftBank of which its founder Masayoshi Son sees a sparkle in the Korean tech firms.

Naver: SoftBank’s key business partner

Naver, established in 1999, set up its Japan unit in 2000, targeting the Japanese market from the very beginning. But it took more than 10 years for it to secure a footing there.

A breakthrough came in 2011, when its Line mobile messenger played a key role in connecting separated families in the aftermath of a deadly earthquake and tsunami.

Line now boasts more than 86 million users, almost 70 percent of the total population.

Naver’s partnership with SoftBank became official in 2019 when the two set up a joint venture, called A Holdings. In another surprise move in March last year, Naver’s Line and SoftBank’s Yahoo Japan announced they were merging into a new entity, Z Holdings, under the arm of the existing joint venture.

It seemed obvious that Naver was losing some control over the immensely popular mobile messenger and its business potential, but industry watchers called the decision “a step back to win big.”

“Naver seems to have made a compromise on Line in an attempt to strengthen its partnership with SoftBank, which is crucial for it to expand its presence in the burgeoning ICT market in Japan,” said Seo Yong-gu, a professor at Sookmyung Women’s University.

“Japan may be a saturated market for traditional industries. But it is not the case for fintech and e-commerce.”

The rare partnership between the Korean and Japanese companies is clearly a win-win: Line may be popular among young people but has struggled to expand its presence largely due to a lack of a local network, while Yahoo Japan, despite its firm footing at home, has long yearned for breakthrough innovations, including globalization.

Z Holdings now has become one of the largest internet companies in Japan, with its business areas spanning some 200 services. Its customer base reaches over 300 million users, covering virtually all internet users in the country.

The firm has pinpointed e-commerce, fintech and public services as the key areas to focus resources. It plans to invest a whopping 5.3 trillion won ($4.42 billion) in artificial intelligence alone for the next five years.

Naver Labs, the research and development unit of Naver, has already joined hands with SoftBank to launch an HD mapping project of Japanese cities that would pave the way for futuristic services running on autonomous driving systems. SoftBank’s Vision Fund has also invested 175.2 billion won in Naver Z, the operator of the Zepeto metaverse platform.

“There is no border when it comes to IT services,” a Naver official said about the bolstered partnership with SoftBank. “In order to gain a competitive edge against Google, Facebook and Amazon that are predominant in Japan, we will closely work with Yahoo Japan by learning their success stories to survive in the market.” 

Coupang: Son’s pet project

Coupang, one of the nation’s top e-commerce platforms, must have been keen on the tie-up between its crosstown rival and key investor.

Starting off as a Groupon-like daily deal service in 2010, Coupang, best known for its overnight delivery service, called “Rocket Delivery,” has seen rapid growth by piggybacking on SoftBank’s investment. After receiving a total of $3 billion of investment from Vision Fund in 2015 and 2018, the platform’s revenue had soared 40 times in 2020 compared to six years ago.

Its blockbuster stock debut in New York in March last year was the culmination of the firm’s relentless expansion. On the first day of trading, the firm raised $4.55 billion, recording the largest US listing of an Asian company since Alibaba in 2014. 
Despite the stellar growth, Coupang has yet to turn a profit, as it is still investing heavily in elevating its market share in the cutthroat competition here without a dominant leader. Currently, the three top players -- Naver, Coupang and Shinsegae Group’s -- make up more than half the market.

Last year, Coupang is estimated to have posted 20 trillion won in sales, up 43.6 percent from 2020, largely buoyed by stay-at-home trends amid the protracted pandemic. At the same time, its accumulative operating loss also reached 4.8 trillion won as of the third quarter last year.

Speculation grew over its growth potential, especially in September last year when Vision Fund shed some 10 percent shares in Coupang following the expiration of an IPO lock-up period. SoftBank still remains the largest shareholder with a 25 percent stake.

“The e-commerce market is still hungry for growth. It seems too early to say Coupang should rethink receiving investments,” an industry source said on condition of anonymity. “Many e-commerce platforms have been left behind in the race because they failed to scale up.”

In order to prove its worth to investors, Coupang is beefing up efforts to improve profitability by almost doubling the fee for Rocket Wow membership, whose subscribers are estimated to have exceeded 5 million people, while expanding its business portfolio from food delivery service Coupang Eats to streaming platform Coupang Play.

Asked about its business happening mostly in Korea, the platform’s founder Kim Bom has dissipated such concerns, saying Korea is the third-largest e-commerce market after the US and China. But it is also true that he has never hidden his ambition to go global.

And its first overseas destination was Japan, a nascent but lucrative market for delivery services. Coupang launched a pilot program last year delivering items from ubiquitous convenience stores to a selective number of districts.

Industry watchers agree that SoftBank’s backing is a double-edged sword, citing a possible conflict of interests even among Naver and Coupang. Both firms are upping the ante in the Japanese e-commerce market that is already crowded with several domestic and foreign players that have direct or indirect ties with SoftBank.

“Not just Coupang, but many tech companies have relied on investment,” said Kim Gwang-seok, chief researcher at Institute for Korean Economy and Industry. “Although SoftBank is highly unlikely to pull all its money out any time soon, it is time for Coupang to show it can stand on its feet with a profitable business model.”

Seo, the professor, also echoed the view, saying: “The next Coupang must know the investment is not for free. It is up to the companies to make the best out of it and come up with a sustainable business model.”

By Lee Ji-yoon and Byun Hye-jin