Kyoto: A Blueprint For Japan?

The ancient capital of Kyoto conjures up images of temples, the tea ceremony, Zen gardens, and high-tech venture companies. Well, OK, not everyone knows that Kyoto is a hotbed for venture startups, but there's a growing group of people in the city who are developing Kyoto's ambitious community of software developers, content providers, and academic researchers into an engine for growth.

THE PEOPLE OF KYOTO'S venture community are a unique breed: part techie entrepreneur, part cultural aesthete, and sometimes two parts eccentric. They're drawn here because of the more laid-back lifestyle -- it's "almost like the West Coast minus the sea," says one entrepreneur -- and the freedom to do your own thing. In fact, some entrepreneurs say Kyoto's strong sense of individualism and dislike of alliances can be a drawback because it's hard to do things on a big scale here. But one thing the Kyoto-ites are very sure about is that they have no interest in trading the calm, creative atmosphere of Kyoto for the more tapped-in yet more strung-out Tokyo.

When I first visited Kyoto Research Park in 1989, it had just opened its doors. Telephone cables still lay waiting for connection on the carpet tiles, yet even at that time some of the original tenants had already laid down some seriously ambitious plans. A Kyoto University professor had founded software startup Kaba (Japanese for "hippopotamus") to take on the US software industry, especially in operating systems. While the professor is still pursuing his goals, Kaba is long gone, a relic of the park's early days.

In 1999, I paid another visit to the park. The original building was still familiar, but not the goings-on inside. The Internet bubble was starting to grow in Japan, and the park was abuzz with activity: Every table in the reception area was occupied, and the area outside was almost all built up.

In May of that year, BusinessWeek ran a cover story on Kyoto as a venture center with the headline, "Japan's High-Tech Hope." The article concluded that the city's new breed of entrepreneurs provides "a chance to write the rule book for Japan's new economy." Heady praise, indeed, and I wondered how true it really was.

When I visited Kyoto Research Park this year, I wondered in particular whether the early entrepreneurs had laid the groundwork for something that could endure the current downturn and thrive later on. Can Kyoto also succeed at the next level -- not just manufacturing high-tech components and materials, which it may well continue to dominate for the foreseeable future, but producing novel services and software systems for the new economy as well?

On my visits to Kyoto's high-tech hubs, I found much to be excited about, and many people dedicated to building Kyoto's reputation. But first, some background.

The land on which Kyoto Research Park stands was formerly owned by Osaka Gas and used for town gas production and storage, which became redundant after the utility switched to natural gas in the 1970s. Yasuo Akasaka, the president of KRP and -- like all the other managers I met -- still an Osaka Gas executive, explained that the company decided to use the land as a research park based on the model of Philadelphia University's Science City Center, which claims to be one of the largest science and incubator parks in the world.

But Osaka Gas is regulated and has close ties to the local government, making the profit motive a lesser factor at the Kyoto park. Instead, a private-public partnership developed here.

KRP is not only the largest privately funded venture incubator park in Japan, but it's also an example of successful collaboration between a private company, the government, and now, increasingly, the academic sector. In the case of the Science City Center in Philadelphia, the park is owned by a consortium of universities and research centers. KRP is 100 percent owned by Osaka Gas, yet a good portion of the site is effectively under the direction of local government bodies.

KRP turned a profit in 1996 and wiped out all its debt in 1998. This July it opened its latest building, which now has 85 percent tenant occupancy. There are 170 tenant companies located in the park, almost 40 of which belong to the Kyoto city government's incubator service, Advanced Software Technology and Mechatronics Institute (ASTEM). A total of 2,300 people work on the site, including staff from Osaka Gas.

The park's most important relationship is with Kyoto city, through ASTEM. Another public body renting space in the park is Kyoto Soft Applications (Kysa), which is funded by the city government, the Ministry of Economy, Trade, and Industry, and the Ministry of Labor. Both ASTEM and Kysa offer highly subsidized office space to early startups.

The Kyoto prefectural government occupies another wing, from which it manages its lending support program to small companies and ventures. A government-funded research institute, the Kyoto Institute of Industrial Research, occupies another wing, and offers industrial testing services for smaller companies at a subsidized rate. Several of the people who sit on committees and help to promote Kyoto as a venture center also maintain offices in the park or use space for their activities. KRP president Akasaka described their contributions as "the actions and aspirations of enthusiastic people who want to break the traditional mold."

A name that comes up often in this respect is Dr. Masao Horiba, the founder of Horiba Corp. He is the honorary chairman of ASTEM and active in almost every other area of the Kyoto venture economy. Born in Kyoto in 1924, he founded his company straight out of university after World War II. The company is now one of the top makers of industrial instruments globally. Horiba personifies the image of Kyoto as individualistic verging on eccentric. His office, located not far from KRP, is rendered in traditional Japanese plastering. In the corner stands a full tea ceremony set, and during our meeting, bowls of maccha (tea ceremony tea) and tea sweets were served.

Horiba is one of several entrepreneurs who enjoys the more refined side of Japanese culture while helping Kyoto develop its venture economy in a different and more accelerated direction than the rest of Japan. Others in this group include Kazuo Inamori, the founder of Kyocera, and Yoshio Tateishi of the founding family of Omron. Horiba describes them as the generation that carried the backpacks to the eighth resting station of Mount Fuji. Now there are only two stations left for the next generation to reach the top.

But Horiba is also an exception: He is a Kyoto native. Most of Kyoto's successful venture entrepreneurs come from somewhere else, yet all of them have an originality that borders on eccentricity. It must be something in the Kyoto air, or in the city's ability to fuse culture with learning. Kyoto people themselves are not inherently risk-takers or entrepreneurial, the locals agree, but they accept and appreciate originality.

When talking of earlier efforts made by the government and universities to assist businesses, Horiba uses the analogy of a "bad masseur massaging the wrong point." The active participation of industry is necessary to direct the hands of the masseur to the right spots, he says. He laments most of all the loss of the postwar spirit of working for a higher goal. Young people don't have dreams, he says, and education is the key to changing this.

Horiba believes the structure in place after World War II, which linked industry, government, and academia in a partnership called san-kan-gaku, needs to be revived to help university graduates again. In his view, the system stopped working after the student uprisings at the end of the 1960s. Trust between the university sector and industry broke down then, Horiba says, but now conditions at the universities are changing, and once again he believes they are producing a type of graduate ready to tap into what he calls "the Kyoto spirit."

Reform of the education sector will play a vital role in the rebirth of the san-kan-gaku relationship, Horiba says. He believes that the government's efforts to stimulate economic recovery by giving more support to the small company and venture sectors has largely forced a re-evaluation of the university's role. The government is considering legislation that would give state universities control over budgets, salaries, and benefits, making Japan's campuses more competitive -- and more like private companies.

Kyoto boasts the largest concentration of colleges and students in Japan as a percentage of population. Leading the way is the University of Kyoto, which is famous for having produced five of Japan's 10 Nobel Prize laureates -- further evidence of Kyoto's originality.

In Kyoto, the third sector (academia) has moved ahead faster than elsewhere in Japan by establishing the Kyoto Consortium of Universities, which was incorporated as a public foundation in 1998, comprising over 40 institutes of higher education. Among its innovations is a mutual credit system, which allows students from one university to receive credits when attending lectures in another, and an intern program to make it easier for students to gain work experience in industry.

The consortium's most visible project is the establishment of a large conference and events building in front of Kyoto Station, called Kyoto Campus Plaza. This was opened in September 2000 at a cost of JPY12 billion. The plaza is strategically located next to the bullet trains, facilitating access for visitors from other major industry centers along the line. Some of Kyoto Research Park's venture tenants also maintain "shadow offices" at the plaza so they can catch the latest buzz.

KRP has proposed that the consortium rent the remaining undeveloped land at the KRP site (18,000 square meters) to establish a university-industry venture collaboration center. The reform of the education system, which will allow universities like Kyoto to set their own budget and investment plans, is likely to be enacted by 2003.

The University of Kyoto is building a new campus facility called the International Innovation Center in Katsura on the western side of the city. The university describes it as "a new center for the integration and transfer of knowledge and information." One goal of the center is to help nurture and spin off business ventures. Its director, Professor Kazumi Matsushige, is also in charge of Kyoto University's Venture Business Laboratory, making him one of the city's most influential venture backers. He is also one of the world's leading researchers in semiconductor materials and has a laboratory named after him. KRP's Akasaka has invited Matsushige to establish an office at the park. Akasaka says that because KRP is halfway between Katsura and the university's main campus, it is in perfect position to serve as a hub.

Another of the "masseurs" working to nurture venture businesses in the region is Professor Ken-ichi Imai of the Stanford Japan Center in Kyoto. Chairman of several committees charged with formulating the venture infrastructure in Kyoto, he has spent the last 10 years running the Stanford center, making him an authority about the challenges and opportunities for Japan in trying to trace the road taken by Stanford 40 years ago. He is firm in his belief that Kyoto cannot adopt the Stanford model.

"The concept of a venture business in Japan and the US is totally different," Imai says. "In Silicon Valley, a company which can get venture financing can get access to the best people -- marketing, legal, software, and so on. They can leap to the No. 1 position by bringing the best human resources together. This doesn't work in Japan because people are attached to a big company. So in Japan, to make a similar leap you have to tie up with a big company."

Still, Imai believes Kyoto offers a special climate for startups. For example, he says, Kyoto has never been the home of a big bank, like Osaka and Tokyo, so it never had an economy dominated by keiretsu affiliations and a top-down business structure.

While there may be a freer business climate for entrepreneurs in Kyoto, Imai says some things don't work well in the former capital. There is little cooperation or integration among companies, he says, and the people are fiercely independent and individualistic (by Japanese standards). Kyoto-ites don't like to cede control to larger entities. In short, they would rather go their own way and survive in a niche than grow in every direction, nurtured by government, big business links, and special banking relationships.

To illustrate his points about Kyoto's unique problems, he pointed to the Keihanna Science City project in the south of the prefecture. As noted in the September issue of J@pan Inc, the Keihanna project is a wonderful concept, but is stranded in the middle of nowhere, and suffers particularly from an absence of strong linkage within and between its various research and venture community parts. Imai wants to help create a clustering phenomenon in Kyoto similar to the cluster of research centers around Stanford University.

Imai and many others I met in Kyoto also spoke of the power of what they call the "Kyoto brand." They suggest that Kyoto has enough allure to make companies and especially foreign business people willing to visit. While Tokyo has been a magnet for companies from all over Japan, companies in Kyoto tend to stay put. Despite being overshadowed by the large, economically and politically powerful Tokyo, Kyoto retains a self confidence suitable to a nation's cultural capital. Seen from its own point of view, Kyoto is the center of Japan.

The new Kyoto station seems to personify this confidence. The soaring structure looks like a Bond Street shopping mall lifted onto a space station, rising over the 19th century railway tracks. Around this status symbol of cultural superiority, the city would like to create a new center more in keeping with the ideals espoused by KRP than with the tourist industry. As if to oblige, Omron recently moved its head office from the western suburbs next to the station precinct. It explained that it wanted to be better connected to the flow of information by being stationed near the bullet train tracks connecting to other main industry centers.

While Kyoto is underpinned by its university culture and strong brand image, it faces the same problems of access to the markets and buzz of Tokyo that other regional centers face. Tokyo simply has the biggest market, the most information, the most software coders, and the best access to finance. It has also received the full influx of foreign financial institutions and legal and marketing firms. The Kyoto brand and lifestyle have not been able to bring in global service companies. The sheer size of Tokyo creates an imbalance that saps the ability of regional economies to expand.

One of the exceptions to this is a new venture capital advisory set up by Richard Okuno, of Japanese-Irish descent. He worked for 15 years in the securities business for blue-chip firms such as Morgan Stanley, and moved to Kyoto earlier this year to start his venture capital business. "The ideal is to live and work in Kyoto and visit Tokyo one day a week," he says. "Tokyo is faddish -- it runs with the crowd. Here people go their own way, so there is less risk of getting taken in."

According to Okuno, Kyoto-based companies have a harder time accessing venture capital than many of their Tokyo counterparts. "The missing link in Kyoto is access to US-style VC, which exists in Tokyo, but not here." But, he adds, "If you are local, you can tap the opportunities." He has rented space in KRP to do just that.

More financing options are beginning to appear in Japan's cultural capital. Future Venture Corp., for example, is a US-style investment boutique established in 1998 by a former employee of a large Tokyo-based VC firm. It has raised a total of JPY4 billion, or about $33 million, for four funds, and has invested in 67 companies, 28 percent of them in Kyoto and 71 percent in Kansai. In October it went public on Nasdaq Japan.

Kyoto is growing into its role as one of Japan's most important high-tech hubs because of the efforts of a few entrepreneurs like Okuno. And several of those leading the charge come from foreign shores.

One foreign pioneer -- and an original in the Kyoto tradition -- is a Canadian, Ian Shortreed, owner of Mercury Software Japan. He came to the region in 1980 as a Kyoto University student with a focus on natural language research. He set up Mercury in 1988 and has since earned himself a place in the local software industry. He thinks he is probably typical of many Kyoto graduates in liking Kyoto and finding an opportunity to stay. "It's almost like a West Coast lifestyle, minus the sea," he says.

Shortreed makes a point of developing software products that are very culturally attuned. His current products include software to summarize text on the fly, a two-way input method to translate Japanese to English and back again, and a virtual 360-degree tour of Kyoto's most famous Zen gardens (the last one could soon be in public teledisplay kiosks to welcome visitors arriving in Kyoto Station). He says Kyodai, short for Kyoto University, is one of the 10 leading centers for natural language research in the world, and he believes the Information Science faculty at Kyodai is "probably the best in Japan."

Another foreigner making a difference is William Maher, the current coordinator and consultant for international business at KRP. Maher is setting up a consulting business at the park to assist local ventures looking for partnerships with companies overseas. He has found 12 companies to back his new company, LinguaTech International, and most of them will be early customers of his services. The new firm will be based at the ASTEM incubator facility, in shouting range of his old office and all of his contacts in the park. KRP has also attracted Deloitte Touche Tohmatsu to provide accounting and other consulting services.

While Kyoto-ites shy from large alliances, they have no qualms about outsourcing. In fact, they've been doing it since the city's kimono industry began to thrive centuries ago. Kimono makers subcontracted work on each stage of the design and production process. Today KRP has updated this tradition with a service called Yorozu, which loosely translates as "Jack of all trades." The service offers a database of 400 ventures and individuals who can do work on an outsource basis for larger customers. All of its 170 tenants are members.

Imai of the Stanford Japan Center says the model of Kyoto's craft industry -- which uses specialists at each stage of development to complete a single product -- is adaptable to technology that stresses modularity. "If you deconstruct a keitai, you will find most of the parts are available from companies in Kyoto," he says. Kyoto's strength lies today in the very specialized parts and materials that form the building blocks of state-of-the-art IT appliances. The leading high-tech companies in Kyoto -- with the exception of Nintendo, which stresses content -- are all parts specialists. Software and content are likely to sustain the expansion of the Kyoto venture economy, although the high-tech manufacturing skills that define Kyoto now will probably determine in many ways how this software is applied, and the kind of unique products that will continue to emerge.

The business of just over half of KRP's tenants is related to multimedia, graphics, or software, making the park one of the major software hubs outside of Tokyo. Some of the leading ventures at the park are Langate, Mag Mag, and Interact. Another is Kai Graphics, which has developed software that can deliver 3-D graphics as an applet to a PC, doing away with the need for broadband connections to the Web for sending data back and forth. The software makes it possible to download a virtual car showroom and rotate a car to view it from any angle. Yokosuka Research Park near Tokyo thinks enough of KRP's software to have formed an alliance with it in mobile technology. An agreement was signed two years ago to share information and promote each other's technology. Yokosuka, which also houses NTT main research laboratories, is the largest research park for mobile technology, but almost all of its technology is hardware.

Imai believes one important area in Kyoto's future will be interactive technology. He believes the human interactive software being developed at the ATR labs will meld perfectly with Kyoto's craft skills in miniaturization and produce a radically new technology. It will result in a variety of new IT products with high levels of human interface, convenience, and Kyoto-style grace.

Shortreed has his own take on the human-interface software that could come out of Kyoto. He is passionate about the importance of voice and language software, most of which is driven by the software sciences of artificial intelligence. As he sees it, ATR is slow in turning what it has into products. But he sees things starting to change now.

Imai chairs a committee under the auspices of Kyoto prefecture that is trying to create a network of IT corridors which will help integrate different industry and technology clusters. These corridors are to have massive broadband capability and an information exchange system or IT portal, which is currently termed the "Kyoto IT Bazaar." When the system is operating -- and there are no concrete plans to implement it yet -- anyone could connect interactively, linking physically separated centers like ATR with other high-tech hubs in the region.

Part of Kyoto's strength is its lack of stifling, centralized structures. When the Imperial Court pulled up stakes and moved to Tokyo after the Meiji Restoration, it left Kyoto free from the suffocating effects of the central government, the keiretsu system, and other large bureaucratic structures that are anathema to entrepreneurs. The lack of these things has allowed interesting initiatives to thrive here, and Kyoto's high-tech pioneers are trying to channel the city's energy to make sure these initiatives grow.

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