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Below is the transcript of an interview with Masahiko Uotani, CEO, Shiseido. The interview will play out in CNBC's latest episode of Managing Asia on 16 November 2018, 6.30PM SG/HK (in APAC) and 11.00PM BST time (in EMEA). If you choose to use anything, please attribute to CNBC and Christine Tan.
Christine Tan(Christine): Uotani San, thank you so much for talking to me. Now, in 2014 you were appointed President and CEO of Shiseido. How does it feel like to be the first outsider brought in to jumpstart a traditional Japanese company?
Masahiko Uotani(Masahiko): Well, I feel it's very challenging, and I really enjoy that right now. But when I made the decision, it was not easy. I had worked for Coca Cola for 18 years, as President and Chairman of Japan, and I was a little, kind of exhausted, you know doing a lot of business trips and uh working everyday looking at the numbers, numbers, numbers. My wife was actually sick and tired of it too. So when they came to talk to me, "We want to appoint you as President and CEO of Shiseido", I couldn't say yes immediately. I said to them, you know, give me three weeks to think about it, I don't know if I really would do it or not. I needed to get the approval from my wife.
Christine: You needed to get approval from your wife. What did she say?
Masahiko: Well, she was not willing to accept that idea in the beginning.
Christine: What changed her mind?
Masahiko: Well, the free product samples. (laughs)
Christine: That was an upside to some.
Masahiko: Joking. But you know, well I thought, this is a traditional Japanese company with 140 years of history. I thought my mission as a business person is to transform a traditional Japanese company to be a real global competitive company.
Christine: Shiseido is a 146 year-old Japanese beauty company and it started out with a western-style pharmacy, then went to pharmaceuticals and cosmetics and skin care. What was behind the company's success in the early years?
Masahiko: From the beginning, Shiseido has built the combination, or I would call it "hybrid model" of Japanese values and Western values. The founder started the business with Western type of pharmacy only 5 years after major revolution, from old days of Japan to new days of Japan. Then second person, who was the son of the founder (Shinzo Fukuhara), started the cosmetics business. He studied in the U.S. at 18 years, when he was young, it was even before 1900. So from the beginning in Shiseido, we had that sort of mindset to nurture what we have in Japan and bring in new values from other parts of the world, combining it and creating new values, that's our DNA.
Christine: When you took over, sales, growth and profitability were declining. The company itself was struggling and you were losing a lot of domestic business. How did the company lose its way? What were some of the problems it was facing?
Masahiko: Well, as what happened to many other Japanese companies, you know the famous "lost two decades" of the bubble economy burst, it motivated many of the Japanese management to be really internally focused, and being more efficient. In other words, cost reduction was a huge kind of strategic initiative for many, many companies.
Christine: So it lost touch with the market?
Masahiko: Yeah, in a sense. Well, I mean the markets were changing very quickly with the younger generation of consumers coming in, so you really have to change yourself to adapt to the new kind of trends in the market. So they were a little behind that.
Christine: As CEO, you laid out vision 2020. What were some of the tough decisions you had to make to boost sales?
Masahiko: I had to really increase investments to build the brands. We are a consumer business company, B2C. So, what is the value of the company I have to grow? And the value of the company includes brand values which are intangible assets, just what I learned from Coca Cola. Coke physically is not a big company, in terms of the number of employees, in terms of the number of assets, physical assets. But it's a growing intangible asset which is the brand, same for Shiseido. We have to really build the brands. So we need investments to do that. In order to get there, my first decision after three months was to build a new R&D center, out of Tokyo – a $400 million investment that is creating innovations, innovation capabilities. Innovation is actually part of building brand values. People obviously choose our brand because differentiated values with what's new, what's exciting, that's important. So, I started from the innovation side and then went into investing in brands which is communication, advertising, promotions, merchandising the stores. Then, I shifted to supply chains, now we are building two new plants in Japan.
Christine: What about the product line-up? Did you have to revamp the entire product line-up? Did you take out everything on the shelf and put in new ones?
Masahiko: Uh, not necessarily, but actually (in) our analysis, we concluded we had too many brands, too many products, so we had to really start focusing on key brands - 6 brands in Japan. We decided out of many brands, we had to streamline some of the brands and businesses. Yes, we did it. At the same time, we had to work on the rebuilding of our organization, particularly in China, the U.S., Europe, and Asia. In Asia you know, we didn't even have any regional head office, so we put that regional head office in Singapore. By doing that we were able to attract many people, talents you know in that region. So, building new organization with new talents was a huge step for us.
Christine Tan: As the first outside CEO, it was natural for people within the organization to feel a little bit apprehensive about the sort of changes you were going to make. How did you eventually win your staff over?
Masahiko: Talking to people. In order to change a company, I believe we have to change the culture of the company: how we work, what we do. It's culture. In order to change the culture, you have to work on changing people's mindset and behaviours. In order to change the mindset of the people, you have to really show the vision and you have to show the analysis: why are we not doing well before and how are we going to solve that? Where we are going? We set the vision called Vision 2020, a six year program. We went to talk to people like beauty consultants who are working on the ground everyday as touchpoints with our customers. They know actually what's not going well, what's the value we can provide, what are the issues we are facing. In the beginning, when I went to talk to people in department stores, they said, we need more product samples. We are selling prestige luxury kind of product, which are very expensive like $100. Therefore, we want to give product samples for our consumers, our customers to test. But we don't do that enough. Okay, so you know, why don't you let them get more? "Oh well, I have to get approval from the head office." So this indicates not only do we need more product samples for the customers, but our culture, the hierarchy, the decision making process of the company must be very centralized at decision-making, which I don't believe is going to work anymore. To put focus on our consumers, you have to be much closer to the market.
Christine Tan: So you cut down the layers of bureaucracy. Have you cut down the hierarchy within the company?
Masahiko: Not only just… you know, for example in Japan, where we were struggling before, when we had (our) headquarters and local sales companies merge into one, and people started working together. People who know the markets and the customers, and the people who are planning for the products and the brands, they are now staying together under one company, which is making a big change.
Christine Tan: Well investors and markets seem to like your restructuring story. Looking at your 2008 earnings this year, what's going to drive most of that growth for you? Which markets?
Masahiko: In terms of categories, prestige brands, luxury brands are driving the growth. In terms of markets, it's China. But you know, it's not only just the China market, I would call it the Chinese consumers who buy our products in China, and at the same time, they travel a lot, 130 million people travelled outside of China last year. And they go to airports, so we have now good merchandising now at the duty free shops in the airports. So it's what we call cross-border marketing.
Christine: So, China is a big factor for you, because sales in China grew 20% last year. Has it become your fastest growing international market?
Masahiko: Among the markets, yes, China is the fastest growing market for us.
Christine : How fast do you see China growing for you this year?
Masahiko: It's even accelerating the growth, higher than 20% yeah. Yes China is becoming the number 2 market next to Japan.
Christine: When it comes to products, are you tailoring a specific range just for the Chinese consumer market?
Masahiko: Getting there.
Christine: Getting there? How soon could it happen?
Masahiko: We're getting there. It is going to happen. You know, we expanded our R&D centers in Beijing and Shanghai, we have made them even bigger. So the R&Ds are going to really see to specific kind of needs in China and we're going to custom make products. Not only that, we are now working with big e-commerce companies and they are telling us based on their data, what are the specific needs they have identified, and we are trying to work with them to have even more customizable products.
Christine: (With) so much reliance on the Chinese consumer right now, are you worried about a territorial dispute that's always been looming in the background between China and Japan? If that breaks out again, could this impact your sales? Are you worried?
Masahiko: Well, we always have to obviously, get ourselves to be prepared for any risk - political risk, consumer (risk), reputation risk, whatever. It's one of them. I do hope it's not going to happen again, and it's not simply negatively impacting our business, it's not good for those two countries. I want the two countries to obviously be building good friendship. So, yes and no. If you ask me if I'm worried, I'm worried but I'm a bit more of an optimist. A lot of people are coming to Japan, you know 10 million people from China coming and a lot of people now are going to China. So among the ordinary people I would say, it's really friendly interaction happening.
Christine: You worried about this so-called trade dispute we're having all over the world between the US, Europe, Japan, China? Are you worried about what's happening on the geopolitical side?
Masahiko: If that lasts long term, that's going to influence consumer psychology. Just as a direct impact by increasing the trade tariff, we don't get the huge impact from that. So, I'm not worried a lot, but if that sort of relationship continues, you know people's mindset becomes very pessimistic, and maybe consumption activity and spending activity would be affected negatively. So that means economically, it's going to slow down. And then the business, not only our business, but everybody's business is going to be negatively affected. So, I hope it is going to be over soon.
Christine: Well, in the process you're upping your R&D staff, you're increasing technology spend. What's the next big skin care technology you're working on?
Masahiko: Well, a lot, new ingredients, new formulations. For example, the one we announced last year is to improve your wrinkles. At the same time, we stepped back and thought, we are now only working in what we call cosmetics. There are so many other kinds of categories to grow in, like you know surgeries. Cosmetic surgery is one of the areas which are growing in Korea, in China and now in Japan even in the Western countries. I don't think we're going to be there, but we thought, can we create a new kind of category in-between? For people who have some problems themselves, like scar conditions, spots, wrinkles, people want to cover that. Therefore, we found an interesting technology in the U.S. - artificial skin, and it's not requiring any surgeries. It's just putting cosmetics on your face. But it's not making you look just nice - just like having a serum. It is not medicine but it is a tube of some liquid, you just mix it and put your face where you want to cover, where you want to hide like maybe spots, and it creates artificial skin on your face, and you look younger.
Christine: What's the potential like for the commercialization of this "second-skin" technology?
Masahiko: Well yes, we're going to make sure that it's going to be commercialized, maybe in the next two, three years. Potential as far as we have surveyed so far, potential is going to be really big.
Christine: Artificial intelligence seems to be the big talk these days when it comes to revolutionizing the skincare and beauty industry. And you bought a tech startup called MatchCo, which specialized in this particular area. Is this the next big bet you're taking when it comes to skin care, beauty and artificial intelligence?
Masahiko: Yeah, that's what we believe, because market is becoming kind of saturated anywhere. Where will you go? There are so many products available, new brands are coming up. So consumers particularly younger generations of consumers are looking for, 'What's good for me? Can you really make something only for me, because I'm different from other people? " Therefore, we look at this opportunity as new opportunities, personalized, custom-made kind of opportunities.
MatchCo technology was developed by three entrepreneurs in Silicon Valley. We talked to them and we bought (the company), and then we sent our R&D people there to work together, to develop sort of a new foundation. So consumers send their information, we capture that and come up with a perfectly matching color of foundation for that person specifically, and we send it to her. So it's a D2C model, direct to consumer.
Christine: So, is this basically a strategy to capture the growing millennial market?
Masahiko: Yes, it's a part of our (strategy) to capture the millennial market as well.
Christine: It's become more innovative, more tech savvy.
Masahiko: Detail oriented, yes.
Christine: In the last couple of years, sales in your Japanese home market have been flagging, but I understand things are picking up sales are growing, is a meaningful recovery now in place in Japan?
Masahiko: Yes, oh yes. Well, you know Japan business has turned around in the last few years. It is growing double-digit, which is good news for us. Obviously, it's driven by consumers, including Chinese consumers coming to Japan and buying our products, that's one factor. What's really important for me is we are increasing our sales with local Japanese consumers as well which is a big recovery.
Christine: How did you manage to do that? What did you have to do to boost sales at home?
Masahiko: Because the market is saturated, we have to be visibly showing what's new, what's exciting, what are the new values to them - more "added" values are very important. At the same time, we have to communicate that through media, through the stores and through our beauty consultants. So, organizational capability is really key for us.
Christine: So you're number 1 in Japan now?
Christine: And you continue to be?
Masahiko: Oh yes, yes. Our aspiration is not only what's the position for Japan anymore, our aspiration is what we can do in the global markets, not only just in Japan. My aspiration clearly is to be a very significant player in the global markets. Top three in a prestige beauty company in the world by leveraging what we have built in our heritage in Japan.
Christine: You're 64 years old, born in the region of Kansai Japan. You graduated with an MBA from Columbia University. You were basically retired. You had worked for these global consumer companies like Coca Cola and Kraft, before Shiseido has actually handpicked you to be the CEO in 2014, now you're in-charge of over 46,000 employees within Shiseido itself. How would you describe your leadership and your management style?
Masahiko: My style is to be close to people. What I have worked in the companies like Coca Cola, I really thought about what is the core value of the company? It's a people business. Delivering brands to consumers, you need a lot of new ideas. I want people to be motivated and trying to add values to the society. So, I think my style is, as I said, without significant hierarchy. I don't like hierarchy. (Christine: You don't like hierarchy) I don't like that. I have no problem to go to talk to our beauty consultants, (who are) working hard every day.
Christine: And how often do you do that?
Masahiko: Oh, I do that almost every week. This week, I went to our branch in Osaka, because you know there was a typhoon that hit the Osaka areas. I spoke to our people there and then I went to the plant, to talk to our people working in the plants, and then I'm here. So I don't just stay in my office.
Christine: One of the things you mandated as CEO was to make sure that English was spoken in your main head office in Tokyo. Why was that an important part of your transformation process?
Masahiko: Well, to make the company really global, communication is indispensable. As I said, to have different background people coming (together) to talk and having communication motivates people to do something really new. If you don't understand what the other person is saying, then how can I expect them to work together? So, communication, communication, communication. Having translators, interpreters was the practice we had in the past, I think there's a limit. Now, people are shifting to -- I have to do something, I have to tell something myself in English. And English has been mandated as a common language for the entire Shiseido head office in Tokyo from October 1st this year.
Christine: So, are we just talking about spoken English or emails also with English?
Masahiko: Emails and all documents are going to be written in English. And if we have only even one person who is not Japanese speaking in the meeting, everyone has to be speaking in English. That's a rule.
Christine: Well, within Shiseido itself for a long time and in any typical Japanese company, there's lifetime employment, not to mention promotion is always based on seniority. As CEO of Shiseido, are you trying to change that?
Masahiko: Oh we are changing that. (Christine: How so?) Well you know, seniority simply doesn't make sense if that person is the right person for the position. So what's very important for us is, when you really think about a position, who is the right person to deliver the mission of the position? It doesn't have to be simply senior person, it doesn't have to be a super young person, it doesn't have to be just male, or female or Japanese, or non-Japanese. Who can really do this job the best? That's the point. So we are promoting younger generation to be taking up important positions, without simply going through the ages as the benchmark, and I'm promoting women to be in the senior positions. We actually achieved our goal of 30% of women being in managerial positions in 2017. Immediately after that, I announced we're going to be achieving 40% target by 2020. We're getting there.
Christine: And finally, as the CEO of Shiseido, driving the company for the last 4 years as the first outside CEO within the company, what's your ultimate ambition for the world's oldest beauty and skin care company?
Masahiko: We want to be a true global company with our Japanese heritage. So, how can we really make sure everybody sees Shiseido (and say), "Oh, that's a great company that is embracing diversity, globally." (It) doesn't have to be maybe the CEO being Japanese anymore in the future. So, a real global company, but (with) a really strong background of our values which was built over 140 years in Japan.
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Managing Asia is the Asia Pacific region's ground-breaking interview programme featuring CEOs, entrepreneurs and other business leaders.