SI Review: June 2012

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Quiet Giant

Post recession, Japan’s staffing market is ready for growth

By Craig Johnson

In this snapshot of staffing climates in various countries around the globe, we profile Japan. Not many people know that Japan is the world’s second-largest staffing market. At one time the country seemed to keep a relatively low profile around staffing outside its borders with only its auto and electronic brands dominating foreign media headlines. That is changing, as more contingent workforce buyers are now including Japan in their global deals. In addition, a number of international staffing firms acquired large Japanese firms in recent years, and one large Japanese staffing provider has expanded internationally.

International staffing deals used to exclude Japan because the market was felt to be different, says Carl Camden, president and CEO of Kelly Services Inc. This attitude is shifting as the market in Japan matures.

“As the talent supply chain orientation is taking hold inside our industry, you can’t leave out a market like Japan,” says Camden, who also serves as a director of large Japanese staffing firm Tempstaff, with which Kelly has a strategic alliance. “It’s too critical to the supply chain of our customers.”

Meanwhile, examples of international staffing firms recently investing in Japan include Adecco SA’s acquisition of Japanese staffing provider VSN Inc. in January 2012 and Randstad Holding NV’s acquisition of Fujistaff in August 2010.

Still, the Japanese staffing industry has faced challenges in recent years. Temporary staffing peaked in 2008, but then the recession struck and the industry declined.

The Japanese staffing industry also faced increased legislation with an amendment to the country’s “worker dispatch law,” which was approved by the government in March and is set to take effect Oct. 1. Staffing industry watchers say the law could have been worse — it originally called for barring temporary staffing in manufacturing. That portion of the amendment was removed. However, the legislation made other changes, including the prohibiting of temporary assignments of less than a month.

With the deliberations on the amendment behind it and a more positive economic outlook, the Japanese staffing market may be heading back to growth even if at a relatively slow rate, says Hitoshi Motohara of Recruit Co. Ltd.

“I am confident the Japanese staffing industry will again grow,” Motohara says.

Motohara is a senior vice president at Recruit Co. Ltd., Japan’s largest staffing firm. He also leads overseas holdings as chairman and CEO of Advantage Resourcing and as chairman of The CSI Companies and Staffmark.

Motohara says labor regulations in Japan can encourage firms to use staffing. “A lot of companies want to use temporary staffing workers because employers can adjust to economic conditions easily and, of course, keep in compliance.”

Staffing Industry Analysts estimates the Japanese staffing market was worth approximately $60 billion in 2011. The largest staffing firms in the country include Recruit, Tempstaff, Pasona Group and Adecco. The market is also highly fragmented with no one firm — outside of the top 10 staffing companies — holding more than 1 percent of the market.

However, the Japanese staffing market does differ from other markets such as that of the U.S.

Different Model

Many staffing firms in the Japanese market are owned by larger business conglomerates, according to research by Staffing Industry Analysts. Owners of staffing firms include auto companies, manufacturers, insurance companies and others.

Some of Japan’s best known companies include staffing firms in their business portfolio, according to Staffing Industry Analysts. Panasonic owns one of the largest staffing firms in the country and Mitsubishi owns 13 different staffing firms.

Scott Sato, president of Pasona Inc., says many large Japanese companies actually have their own staffing divisions, although the government is making that staffing model more restrictive.

That’s not the only difference in the way the staffing market operates.

It’s not legal for one staffing firm to subcontract out workers from another staffing firm, Sato says. As a result, Japanese firms tend to be larger so they can handle all of a client’s needs rather than subcontracting out.

Japanese agency workers also tend to have longer tenure and assignment he says. The average tenure at Pasona for a temp is 17.2 months, although the company has some workers who have served for 25 years, taking on different temporary assignments. In addition, 90 percent of Pasona’s assignments are for three months or longer.

“It’s a different business model than compared to the U.S.,” Sato says. There is more responsibility for taking care of the worker and seeing that he or she gets fringe benefits and training to learn new skills, he says.

Although Japan has been heavy on commercial staffing, growth is expected for professional staffing.

“What we see the most growth in next are technical IT, accounting, finance,” Sato says.

David Swan, managing director of Japan/ Korea, for Robert Walters plc, also sees a pickup in professional staffing even as commercial staffing has declined.

“This is a great thing for Robert Walters,” Swan says. “We are a mid-career recruiter and the majority of the contract work that we do is professional staffing.” The professionals for which demand is growing include IT, engineers and accountants.

Robert Walters is a provider of permanent placement and temporary staffing with 48 offices in 23 countries, including offices in Tokyo and Osaka, Japan. The company’s contract recruitment business in Japan specializes in placing bilingual Japanese-/English-speaking professionals.

Outsourcing

Japan’s staffing market is younger and less penetrated in the professional/technical space than Western Europe or North America, but it’s catching up, says Kelly’s Camden. Vendor management systems and managed service providers aren’t as prevalent, and it’s more difficult to implement VMS-type solutions because of how they interact with dispatch laws.

“What I do think the industry will see is a lot of growth in the outsourcing side of the equation,” Camden says.

Other players in the market agree with this view. Marcel Wiggers, chairman and CEO for Randstad/FujiStaff Japan, said outsourcing is spurred by Japanese regulations that limit work through temporary employment agencies to three years in 26 job categories, which includes jobs with computer operation skills.

Once the three years are up, companies may still want those people, Wiggers says. But they may not be able to hire them through agencies, and instead have to switch to direct hire full time. The result is a move to outsourcing where staffing firms take on management responsibility for people and document flow and allow the staffing client to outsource the work to the staffing firm. FujiStaff, a Japanese staffing firm acquired by Randstad, has a strong presence in blue collar outsourcing, he says.

Wiggers also sees growing demand for professional staffing, including engineering and IT. Engineers are needed to rebuild after the 2011 earthquake. In IT, there is demand for workers in the smart phone sector to keep up with demand.

“There are more smart phones than people at the moment,” Wiggers says. “If you see young people here, they have two or three smart phones per person.”

One challenge in Japan is that staffing salaries tend to be relatively low, so there are some people who do not regard staffing very highly. However, salaries are slowly starting to rise. In addition, there are some people who prefer staffing because they get paid overtime and don’t face the long hours that can be the norm for permanent employees. Wiggers says some permanent workers in Japan can start work at 8:30 a.m. and not leave the office until after 10:30 p.m.

The Japanese staffing industry also has a different background than the U.S., and the market is seeing tighter regulations.

The Japanese staffing industry only got fully under way in the 1980s with the enactment of the “worker dispatch law.” This law went into effect with 13 types of work approved for temporary staffing. However, it wasn’t until the 1990s that the market was liberalized to a reasonable degree. While the list of jobs was later changed to 26, the law didn’t allow for temp staffing in manufacturing until 2004.

But it was only in March this year that an amendment to the worker dispatch law adds restrictions and prohibits temporary assignments of less than 30 days. It also urges employers and staffing firms to give temporary workers the same pay as regular workers if the temps are doing the same work. However, a rule that would ban temporary staffing in the manufacturing sector was not included, as it was in the original bill.

Wiggers says short-term, day-labor type staffing is still allowed, but only for certain groups such as students, the elderly and those who already have a primary source of income.

The one-month minimum holds for everyone else, Wiggers says. Even prospective temporary workers cannot take short-term jobs while they interview for longer-term assignments with staffing clients. And, typically, all temporary workers interview with clients in Japan before they receive assignments.

“Overall, it’s better than initially proposed,” he says of the recent amendment to the worker dispatch law. “But it’s not as good as we would like to see it for Japanese business and society as a whole.”

Economic Turbulence

Japan ranks as the third-largest economy in the world behind only the U.S. and China. However, it didn’t escape the recession.

Japan posted some of the highest economic growth rates in the world from the 1960s to the 1980s, but it slowed dramatically in the 1990s. The economy posted growth in the 2000s until the recession took its toll in 2008.

Gross domestic product rose in 2010 but contracted in 2011, according to U.S. government data. Japan was struck by a 9.0-magnitude earthquake and tsunami on March 11, 2011, which damaged the northeast coast of the Honshu Island. Radiation leaks at the Fukushima Daiichi nuclear power plant caused mass evacuations.

Despite these recent challenges, the Organization for Economic Co-operation and Development does forecast GDP growth of 2.0 percent this year and 1.6 percent in 2013. The agency had cited a decline in GDP of 0.3 percent during 2011.

Meanwhile, international staffing firms seem to be bullish on the Japanese staffing market. And they are voting with their pocketbooks.

Mergers & Acquisitions

A few of the notable deals include Adecco SA’s acquisition of Japan-based staffing firm VSN Inc. in January 2012 and Randstad Holding NV’s acquisition of FujiStaff, the 38th largest global staffing firm.

“This is a rare opportunity for us to expand our Japanese professional staffing business in the world’s second-largest staffing market and it is an excellent fit with our global strategic priorities,” Adecco CEO Patrick De Maeseneire said at the time Adecco announced the VSN acquisition. “The move will instantly double the contribution of professional staffing to Adecco’s revenues in Japan and reinforces our strong position in an attractive structural growth market.”

It’s not just about outside investment in the country. Japan-based firms have also acquired other domestic companies.

Recruit Co. Ltd. for instance has been busy buying staffing assets outside the country, and recently acquired Staffmark in the U.S. as well as Advantage Resourcing’s U.S. and European operations. Recruit gets the U.S. and European businesses of Advantage Resourcing in the $410 million deal as well as operations in Singapore, Hong Kong, Australia and Dubai. The business lines posted revenue of approximately $1.4 billion in their fiscal year ended June 30, 2011.

Recruit struck a deal in October 2011 to buy Staffmark, the 14th-largest U.S. staffing firm. The deal gave Staffmark an enterprise value of $295 million.

The deals seem to signal a growing interest in Japan, both inside and out. It also shows that confidence remains in the market.

With deliberations over the “worker dispatch law” behind it, more integration with international staffing contracts and the real possibility of growth ahead, Japan may turn out to no longer be the quiet giant of the global staffing industry.

Craig Johnson is managing editor, staffing publications, at Staffing Industry Analysts. He can be reached at cjohnson@staffingindustry.com.

[SIDEBAR]

Mergers & Acquisitions in Japan

Here are a few of the larger acquisitions of Japanese staffing firms by international firms in recent years.

  • Adecco SA buys VSN Inc. of Japan in January 2012. Tokyo-based VSN focuses on the engineering segment with branches in eight major cities. VSN posted revenue of approximately $203.0 million in 2010.
  • Management of Prompt Holdings, Japan’s seventh-largest staffing firm struck a deal to buy the company from an investment group that includes New York-based private equity firm Cerberus Capital. Prompt sold off most of its U.S. and European operations late last year. The deal was announced in March 2012.
  • January 2012 Pasona Group acquired an 85.51 percent stake in the Caplan Corp., a Tokyo-based staffing provider from Itochu Corp. and Japan Airlines Co. Ltd. Caplan posted net sales of ¥15.19 billion (US$183.3 million) in its fiscal year ended March 31, 2011. The deal was announced in January 2012.
  • Randstad Holding NV announced in August 2010 that it would pay ¥13.7 billion (US$160.0 million) to acquire shares in FujiStaff that it did not already own.

[SIDEBAR]

Downtown on the Farm

Pasona put a farm — a rice paddy — in the basement of a Tokyo office building, an area that formerly served as a bank vault. The aim was to create interest in farming among city dwellers. The company has since moved within Tokyo, but Pasona’s current headquarters now has more than 200 vegetables and plants within the building — including sprouts and bean buds in the hallways of the ninth floor. The company even had a rice paddy in its lobby, but changed the lobby area to a stage surrounded by water where musicians perform daily. The change in the lobby came as part of an effort to conserve electricity after the 2011 earthquake. Fresh vegetables from the urban farm are used to cater healthy meals for company employees.

[SIDEBAR]

Declining Population

Japan’s population of 127.4 million fits in a country that is slightly smaller in area than California. However, the population is declining and some estimates say it could have 30 percent fewer people by 2060. The main language is Japanese. There appears to be a cautious attitude toward staffing in some quarters, and Japan is one of the few countries increasing regulation of the industry.

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