MARKET OVERVIEW
Japan’s contact lens market was worth ¥50.8 billion (about $508 million) in 1995. A total of around 30 contact lens manufacturers operate in Japan, including foreign companies. The top five, including Bausch & Lomb, account for 70% of the market. Eye doctors in Japan generally recommend and prescribe hard contact lenses to their patients. As a result, 60% to 70% of Japanese contact lens users wear hard lenses. However, with recent advances in the oxygen-permeability of soft lenses and the introduction of disposable contact lenses (categorized by Japan’s Ministry of Health and Welfare as soft lenses), the use of soft lenses is growing rapidly. Due to this growth, soft lenses are potentially in a position to gain dominant market share in the near future.
The sale of soft contact lenses accounted for ¥26.8 billion (about $268 million) of 1995 contact lens sales. Hard lenses accounted for ¥24 billion (about $240 million). That year, ¥500 million (about $5 million) worth of hard lenses were imported to Japan, a decrease of 17.9% from the previous year. At the same time, imports of soft lenses skyrocketed. Soft lens imports to Japan totaled ¥10.8 billion (about $108 million) in 1995, an increase of 101.7% over 1994. In total, about 40.2% of the soft contact lenses and 2.2% of the hard contact lenses sold in Japan are imports. At this time, all of the disposable soft lenses sold in Japan are imported.
This report examines Japan’s contact lens industry, its structure, regulatory issues, and opportunities for foreign firms. In order to explain the factors affecting the industry, medical regulations, Japanese antitrust law, and the role and function of the Fair Trade Commission of Japan (JFTC) are also discussed.
REGULATORY ISSUES
Regulatory issues help shape Japan’s contact lens market. The Ministry of Health and Welfare (MHW) is the organization responsible for “protecting and promoting the health and welfare of the people.” As such, it has regulatory authority over the manufacture and importation of contact lenses, which are legally classified in Japan as “Medical Equipment.” The process of obtaining such approval (for contact lenses or any other type of medical device) can often be tedious and expensive.
Other regulations govern the distribution and sale of contact lenses. Retailers who wish to sell contact lenses must complete a registration process with the local municipality. An eye examination and prescription from a qualified eye doctor are required before contact lenses can be sold to a customer. Health insurance generally covers such examinations and prescriptions. Finally, it is illegal for eye doctors to sell or distribute contact lenses directly from their offices or clinics. As such, many doctors own and operate contact lens retail stores as separate business entities from their medical offices.
ANTITRUST LAW IN JAPAN
In the prewar years, Japan’s economy came to be dominated by a few highly powerful business conglomerates, known as zaibatsu. The influence of zaibatsu over Japan’s economy was staggering. Over time, their political power grew as well. The zaibatsu played a large role in World War II. Thus, after the war, the allied occupation authorities ordered the zaibatsu dissolved. Japan’s most important antitrust law, the “Act Concerning Prohibition of Private Monopolization and Maintenance of Fair Trade” (also known as the “Antimonopoly Act”) was enacted in 1947 during the allied occupation of Japan. 2 The Fair Trade Commission of Japan (JFTC), which enforces the Antimonopoly Act, was also created under the allied occupation. As a result, Japanese antitrust regulations and regulatory bodies are similar to those in the United States.
The allies had lofty goals for the Antimonopoly Act. It was meant to help bring about social and industrial democracy by creating and maintaining free and fair competition in the private sector. It was also intended to help redevelop the devastated Japanese economy by encouraging the creation of new enterprises and increasing employment and income levels. For these reasons, the original law focused on restraint of trade, trade practices and free competition; trade associations; mergers and acquisitions; the conduct of large firms in relation to the market, including their clients; monopoly and oligopoly; restrictive international arrangements and agreements; and safeguarding the interests of consumers.
Over the past 25 years, the Japanese government has focused on promoting economic growth through cooperation between government and industry. During this period, antitrust laws were not vigorously enforced. However, the atmosphere in Japan is now changing. Japan has been in recession since 1990, and some of its economic and business problems are attributed to previously lax antitrust standards. Japan has begun to deregulate many of its industries and is becoming more open to two-way international trade and globalization. In recent years, the Antimonopoly Act has been amended to be more responsive to the changing environment. In 1991, the law was revised to raise penalties against cartels (organizations that maintain or raise the price of a good through tacit agreement with other companies in the same industry). In 1992, further revision increased criminal penalties against firms attempting to establish monopolies or cartels. In 1996, JFTC was reorganized and strengthened. These changes have strengthened Japan’s antitrust law and fortified JFTC as Japan’s primary antitrust regulatory agency.
THE ROLE OF THE JFTC
The JFTC is charged with administering, interpreting, and enforcing Japan’s antitrust law. Its activities include the following:
1. Investigation of alleged violations of antitrust law. If the JFTC uncovers a violation, it can issue a cease and desist order and impose a fine against the violator.
2. Reporting Requirements. The JFTC requires that firms, trade associations, and other business organizations complete certain filing requirements. Specific reports, action notifications, and other materials and information may be required. The JFTC examines such information for compliance and violations.
3. Research, Fact Finding and Investigations. The JFTC carries out research, fact finding and investigations with respect to various firms, industries and business practices in Japan. Transactions between and among businesses and groups, distribution and marketing arrangements and the effectiveness and fairness of governmental antitrust regulation are also examined. These activities help the JFTC identify problem areas and enforce the law.
ANTITRUST AND THE CONTACT LENS INDUSTRY
A. BACKGROUND
The efficiency of Japan’s healthcare market directly affects health and health-related expenditures by its government and its citizens. Thus, JFTC is concerned with ensuring a fair and efficient marketplace for medical equipment. Japan’s health insurance system is running heavily in the red. The problems are many. Some problems stem directly from the Ministry of Health and Welfare’s administration of the health care system. Other problems are related to business customs and the complexities of Japan’s distribution system. Finally, some of these problems are antitrust issues that involve the JFTC.
The markets for certain medical products, including contact lenses, are characterized by large discrepancies between the prices of domestic and imported products. For example, in 1997 the average recommended domestic manufacturers’ price for contact lenses was ten times the price of imported contact lenses. 3 The JFTC is concerned that such price discrepancies may hinder fair competition and force consumers to pay unreasonably high costs for products.
There is a close relationship between contact lens manufacturers and the estimated 8,000 to 10,000 contact lens retailers throughout Japan. Direct distribution by manufacturers to retailers accounts for 86% of distribution. Distribution through middlemen (wholesalers) accounts for the remaining 14%. Thus, the JFTC is concerned that violations of the Antimonopoly Act are prevalent in the industry, which is also characterized by complicated business customs and distribution systems. To examine these concerns, the agency recently completed its “Report Concerning Distribution of Contact Lenses.” In the report, the JFTC argues that the contact lens industry is rife with Antimonopoly Act violations and other practices the it considers unhealthy to a free and open market. Three specific industry-specific characteristics which lead JFTC to its conclusion are:
1. Manufacturers “recommend” prices to retailers and others;
2. Manufacturers are directly “involved” in the retail sale of contact lenses; and
3. Doctors exercise great power over and are “involved” in the sale of contact lenses.
B. MANUFACTURERS HELP SET RETAIL PRICES
Contact lens manufacturers recommend the prices their retailers should charge to consumers. The manufacturer’s price to the retailer is about 27% to 28% of the manufacturer’s final recommended retail price. This amounts to a seemingly unwarranted profit margin of 72% to 73%. Manufacturers and retailers explain this price differential by the fact that many retailers pay shipping costs. Additionally, manufacturers generally wish to include the cost of the required eye examination in the recommended price. However, consumers are not educated to understand that the price of their contact lenses includes the cost of their eye exam. As a result, many consumers are charged for their eye examination and their lens prescription twice (i.e., once when the doctor examines them and writes the prescription and again when they are fitted for contact lenses). Of course, in most instances, responsibility for the cost of the examination and prescription is then passed on to and paid by the government through the health insurance system. Such inefficiency and waste is one reason why the national system is in such trouble.
Manufacturers also attempt to interfere with retailers to insure that they do not discount the manufacturer’s recommended retail price. The JFTC found that manufacturers check the contents of retailers’ local advertisements to determine if prices are discounted below their recommended price. However, over the past several years, retail prices of contact lenses in Japan have gradually fallen, with the steepest decline occurring in the Tokyo metropolitan area. 4 Thus, despite manufacturers’ efforts, contact lenses can sometimes be found to be selling for 50% to 70% of the recommended retail price.
C. EYE DOCTORS ALSO INFLUENCE PRICING
In Japan, contact lenses may be dispensed only with a doctor’s prescription. This requires a paid eye examination. Doctors may not legally sell contact lenses directly from their clinics or offices. They must refer patients to an optometrist clinic to be fitted for lenses. In its study, the JFTC found that many doctors operate their own separate contact lens retail stores, often near their eye clinics. By referring their patients to their own retail stores (which sell contact lenses at full price), doctors are able to charge patients for the eye examination twice.
Despite the fact that large discount chain stores have begun to sell contact lenses at heavy discounts (taking a large share of the market in the process), doctors still wield enormous power in the retail (and probably wholesale) contact lens marketplace. Some regional eye doctor associations are strong enough to decide what an area discount rate should be (or even whether there should be a discount). These groups also pressure other retailers to limit their discounts and not to open new contact lens stores.
D. ANTITRUST RESULTS
While it is unclear what action the JFTC will take based on its findings, the agency does believe that the practices of contact lens manufacturers, retailers, doctors and others, constitute violations of the Antimonopoly Act. The law provides for both civil and criminal actions and penalties. However, the Japanese do not wish to injure a growing and profitable contact lens market and must therefore proceed cautiously. Because of the complexity of the market, domestic and foreign contact lens manufacturers, and government regulators are collaborating in their efforts to determine how this business should be conducted.
CONCLUSION
The Japanese contact lens manufacturing industry is competitive. More manufacturers are expected to enter the market; this is expected to further increase competition. Many of the new domestic contact lens manufacturers are large companies in the fiber and chemical industries who wish to diversify into the medical business. These companies have substantial capital and resources to undertake the necessary R&D to bring new technology to the market. Domestic contact lens retailers also face growing competition because of the introduction of large discount retailers. Finally, as Japan simplifies its medical market and health insurance system to reduce costs, the contact lens market will become more efficient and easier to enter, leading to even greater competition.
Establishing a strong brand is critical in the Japanese market. JFTC director Mr. Akinori Yamada argues that Japanese consumers tend to focus on brand names, rather than manufacturers’ names. If true, U.S. and other foreign companies importing contact lenses into Japan (or manufacturing them in the country) would not be at a disadvantage.
Another JFTC official argues that foreign contact lens manufacturers may easily enter the Japanese market. In fact, a JFTC survey of foreign manufacturers of contact lenses found that none felt there were difficult or significant obstacles other than the long, slow and costly MHW regulatory approval process. However, it must be noted that all of the manufacturers surveyed were foreign companies that had experienced some degree of success in the Japanese market. It has been argued that foreign manufacturers that do not establish local relationships with eye doctors, their associations, retailers or others will not (and have not) been successful.
If the above is true, the key to success for foreign contact lens manufacturers is to establish such relationships and follow local business customs. However, building relationships in Japan is often very difficult for foreigners and foreign companies. Most Japanese view foreigners with some degree of skepticism. Furthermore, it is essential for businesses to understand and meet the needs of consumers. There appear to be some signs of success by foreign manufacturers and other foreign businesses in the contact lens market. Furthermore, though this case study is limited to the contact lens industry, its examination of the role of the JFTC and antitrust regulations in Japan should be useful to other foreign medical companies who encounter monopolies, oligopolies, or other antitrust related issues in Japan. Regulatory professionals at foreign medical companies can use the JFTC and its findings to their advantage. Accordingly, market opportunities are available for businesses that follow the appropriate practices and understand these important issues shaping the Japanese market.
SOURCES
1. For more information, see “Report Concerning Distribution of Contact Lenses,” Fair Trade Commission of Japan, 1997.
2. See http://www.jftc.admix.go.jp/e-page/acts/amact.txt for an English translation of the Act.
3. Contact lens market to grow with sagging prices.” The Japan Medical Review. April 1997, p. 15.
4. Consumer Price Index (CPI) information and other retail sales figures available through the Ministry of Public Management, Home Affairs, Posts, and Telecommunications