Japan’s Gulliver International: Driving Innovation with Stellar Growth

February 17, 2005

Speaker
Ikuo Murata, Senior Executive Vice President, Gulliver International Co., Ltd.

Presider
James G. W. Reed, Executive Managing Director, Equity Division, Mizuho Securities USA

Ikuo Murata, Senior Vice President of Gulliver International Co., Ltd., spoke about his firm, Gulliver International Co., Ltd., an innovative company that has become Japan's largest used car dealership since its founding in 1994. Mr. Murata oversaw much of that growth personally, having joined Gulliver from the role of an external consultant in 1998.

According to Mr. Murata, the biggest challenge to a Japanese used car dealer is that the time value of autos in the secondary market erodes rapidly: in the first year, depreciation is as much as 50 percent, or twice the rate of the U.S. market. Secondary market prices are also very volatile. To grasp these points is to understand Gulliver's strategy of accelerating inventory turnaround time. Mr. Murata stressed how Gulliver's founders succeeded in reducing the industry average from three months to two to three weeks. He said Gulliver has a nationwide change of purchasing stores with direct lender franchise companies, but it also deals wholesale, and through a satellite system linking 10,000 locations, and over the web. In January 2005, Gulliver launched a real-time options exchange on the Internet targeted to used car dealers who like to trade price discrepancies, he noted. In short, although Gulliver is a principal, it has elements of both the exchange and dealer operating model. Perhaps for this reason, Gulliver's peers in terms of scale of activity are not only Toyota, Nissan and Honda (among which it ranks third, ahead of Honda) but also the large Japanese used car exchanges: USS, JAA and AucNet, according to Mr. Murata.

Another Gulliver innovation is its solution to the dealer storage and display problem with inventory-free stores, Mr. Murata explained. They are "inventory free" because they utilize advanced GPS technology to create virtual images that cannot be distinguished from real pictures of cars, he said. Even though customers are initially suspicious about buying inventory that they cannot touch or even see, Mr. Murata says their concerns are allayed by the extensive data disclosed to the buyer on the automobile. "The dealers can hide problems with the real car--there are a lot of tricks--so we open up every kind of information." He said shoppers readily accept the virtual showroom concept once this point is explained to them.

According to Mr. Murata, Gulliver started out by franchising, which allowed them to scale up quickly. They outsourced the development and supervision of franchisees to Venture Link, Mr. Murata's former employer. The main business content was divided between automobile-checking, decentralized at the franchisee-level, and pricing, which they centralized, he said. Eventually, they built a database to enable them to optimize the information gathered through the network on sellers (70 percent of onlookers), buyers (13 percent), participating stores and inventory, Mr. Murata said. They also spent lavishly on advertising to improve their market image, with mixed results. Nevertheless, cultural change has favored the Gulliver concept, Mr. Murata said: The average Japanese shopper used to shun discount stores, but today discount shopping is very acceptable and even preferred.

From the consumer's viewpoint, your advantage is the price. How will you get into the new car market if the dealers are using fictitious prices?

Gulliver has no special method for growing market share other than to keep pursuing strategies that worked and seeking new ones, according to Mr. Murata.

What was the original concept of your business? Does it exist outside of Japan? What is your client mix?

Mr. Murata said 80 percent of Gulliver's business is wholesale and 20 percent is to consumers. Japan's rapid depreciation makes the concept of Gulliver International unique to Japan. Nevertheless, Gulliver may try to establish a business in California as well.

Why are you moving to the U.S. when there's so much room left in Japan and such an excess of used cars here?

The thinking is to create spillover business into California from Japanese who go there, Mr. Murata explained. In any event, the budget is very small, limited to advertisement and e-mail; Gulliver will send their sales force over only in response to interest generated in this way, he said.

Do you have plans to go into other Asian countries?

Mr. Murata reasoned that expanding in Asia, especially China, would be difficult. "Most countries prohibit importing cars from other countries because it destroys the new car market," he explained. Within Asia broadly defined, the largest importer of automobiles from the outside is New Zealand, followed by Dubai, where most of the imported cars are trans-smuggled into Africa, Mr. Murata noted with irony.

Does Gulliver International do consumer finance?

"We have just started," he responded.

Your profit margins seem to be lower than those of USS--they are under 10 percent. What is your target and how do you intend to achieve it?

Mr. Murata explained that USS is not a dealer, it is an exchange, so their margins are naturally very different from Gulliver's. As for a profit target, "We don't have one." But it has a strategy, which he said is two-fold: to keep down the cost and boost profitability by expanding the sell side of the portfolio. Mr. Murata said an average car sells for ¥840,000; Gulliver's unit gross margin is ¥171,000 but its unit operating margin can be as high as ¥150,000. "This business is easy to get into, but it is not easy to make money in," he commented wryly.