Secondhand alchemy: Japan's Anchor Networks recycles junk into cash.

JAPAN'S obsession with the latest consumer products, coupled with its throw-away culture and tightening government regulations, has created an entire industry around recycling and exporting "junk." The most notable segment of this industry is the secondhand car industry.

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IN 2003 JAPAN SLIPPED abroad 720,000 used vehicles, accounting for 20% of sales. This amounts to 30 monthly shiploads of vehicles to New Zealand, the UAE, Russia, Peru, the UK, the Philippines and elsewhere.

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But not everything that is pre-used is exported; there is also a healthy market in Japan. The Nikkei Shimbun, a respected financial daily, reckons that annual sales of recycled goods will reach [yen]50 trillion (US$45 billion) in 2004, about 10% of Japan's nominal GDP. Much of this is in the auto industry. The overall domestic market for vehicle parts and accessories, including tires and audio systems, was [yen]55.5 billion (US$504 million) in 2002. Indeed, used vehicles (5.36 million) exceeded new vehicles in number of registrations by 33 percent in Japan during 2003.

Just as the used car market is changing the economic landscape for auto manufacturers, the personal computer and office automation recycle market is transforming the PC/OA Industry. Analysts estimate that the domestic market for used PCs will double in the next 12 months, reaching a value of some [yen]200 billion (US$1.8 billion) within FY2005. The Nikkei says that 90% of used PCs and OA equipment is sourced from leasing firms upon the expiry of four-and five-year leases and companies upgrading their infrastructure to stay up to date on the software side. Luckily for international traders of secondhand goods, because Japan is so far ahead in this technology, what is junk to local firms still has value and can be pressed back into service overseas. Examples of still useable equipment being trashed in Japan include 17" LCD displays, color photocopiers, intelligent factory automation equipment, and all kinds of electrical equipment.

The main barrier to international buyers wanting to source reasonable quality used goods from Japan is the cost and complexity of gathering sufficient stock. Not only is there the need to actively seek out sellers of such products and pay for them in advance, there is also the need to warehouse, check equipment functionality, repair broken units, and handle sufficient volumes of similar models so as to make overseas shipments commercially viable. One company which has perfected its collection, control, and resales system is Anchor Network Service, based in Kanamachi, Katsushika-ku, Tokyo's eastern-most ward.

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Floating Recycling as a Business

The CEO and founder of Anchor Networks Service is 44-year old Tokyo native Takashi Ikari. He came up with the idea of a recycling business while working as a salesman for Matsushita Denki. He couldn't help noticing the high volume of perfectly useable equipment customers were trading, and which was simply being scrapped--at high cost to the company. He realized that he might be able to start up a niche business saving both the manufacturer and frugal customer money. In 1993, he started his own firm, Anchor Networks Service. He decided to launch with two lines of business: recycling and real estate, the latter a backup in case the business went bad. However, he needn't have worried because he wound up catching the front end of a massive shift in consumer awareness toward recycling as a virtue. Just 10 years later Anchor Networks Service would be a multimillion dollar business.

The early days were spent seeking out sources of old PCs and working out a system for refurbishing and then selling them. Back then it was easy to find unwanted equipment, but the sources were small and highly dispersed, making collection difficult. He overcame this by spending a lot of time and energy working relationships with the big leasing firms, who handle the bulk of Japan's business-driven PC/OA sales. At first the companies were suspicious and concerned that Ikari's firm would compete with their new product sales. But when they realized that there was a lower end user in the market whom they couldn't service economically, they started opening up their inventories to him.

The other major early hurdle was how to sell the ex-lease units. Ikari's initial idea was to sell direct to consumers, and indeed over time he has been able to achieve more than 50 percent direct sales over the Internet. But back in the early nineties, the solution was exporting container loads of equipment to Southeast Asia and India. Business was slow but steady, and gave him a base to build his business.

By the late nineties, other companies, including some manufacturers, began to realize that Ikari had a noteworthy business, and competition appeared. Anchor, ever the innovator, met the challenge by getting a broader trading license to process and recycle industrial waste. While not an attractive business at the time, the expertise gathered then allowed Anchor to set up a comprehensive "soup to nuts" approach to recycling materials that came to him. Today the company boasts a recycling utilization rate of 97 percent.

Lean Business Model

Anchor's business model is to buy product from both individual customers and major lease companies, then repair or recondition still useable items, while extracting raw materials from those items that really are junk. The company sells more than 15,000 reconditioned PCs and accessories a month through company-owned and affiliate stores and on the Internet. It offers a one-month guarantee and to cover its risk, it operates a repair center that evaluates and tests every single piece of equipment. Certified equipment is warehoused and marketing continues until it is sold.

A key turning point in the company's profitability came when Ikari realized that sourcing inventory from individual customers isn't that profitable. Although PC recycling was mandated by the Japanese government in 2003, and in fact, according to the PC3R organization, 183,000 PCs have been recycled under the law, the channels that a consumer can work through are many and varied. For convenience, most product is returned through brick-and-mortar storefronts operated by some of Anchor's competitors. Ikari's solution to sourcing inventory was to find volume sources, such as leasing and manufacturing companies and government organizations, and "plug" into them. To this end, he has a team of eight who do nothing but maintain vital relationships with the company's 40 plus key inventory sources. Anchor's partners make up a Who's Who of corporate Japan, including NTT and Nihon Shinpan.

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A side benefit of dealing with large-volume sources of inventory is that much of the inventory is in reasonable condition and products tend to be of similar spec. This dramatically reduces the costs of refurbishment and facilitates bulk export to eager overseas buyers. For example, a working three-year-old flat panel display sold overseas in volume still fetches about US$80-100 per unit.

Of course, as Anchor's business grows, competition is intensifying from some former allies: the leasing and manufacturing companies. Rather than watch its sales slow, Anchor is staying ahead by moving into more technical and industry-specific products, such as semiconductor manufacturing and factory automation equipment. Even though such equipment was leased, the leasing firms are reluctant to repossess it physically because it is customized and fixed into the plant, thus disposal is difficult. Instead, the service subsidiaries of the original manufacturers are more likely to be tasked with disposal, and thus Anchor is offering these firms the same level of convenience and ready cash that it has acquired in the PC and OA business. The final destination for such equipment is usually China, Thailand, or another offshore manufacturing center.

As manufacturers are discovering that Anchor has the ability to sell relatively large volumes of specialist equipment overseas, they are asking the company to quietly handle more on their behalf--to the extent of recently doing shipments from the USA into China, without going through Japan.

What distinguishes Anchor from most other recyclers is its ability to extract profit from all points. It works all parts of the acquisition/repair/resale supply chain for profit, rather than just trying to increase sales through the number of stores. As a consequence, the company owns only two brick-and-mortar stores, and instead works through agents such as the co-op chain Community Mart, the Internet--through a major store on Rakuten and another on Yahoo Auctions--and business-to-business deals with overseas partners.

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Business over the Internet runs around [yen]7-8 million (US$63,000-72,000) monthly, with almost no cost other than a [yen]50,000 (US$454) fee for the store and a couple of percent on each sale to the mall operator. Further, Ikari keeps staffing as low as possible, employing only 130, including part-timers. As a result, being lean and mean has created gross profit of up to 30 percent on most trades and a pre-tax return of 10-12 percent a year.

Dueling the Competition

One recycler in Anchor's sights is Sofmap, the massive [yen]113 billion (US$1.03 billion) operation based in Akihabara, Tokyo. Sofmap almost went bust in the late nineties and is now firmly controlled by Nomura Securities. Sofmap has more than 38 stores around Japan, and plans to open at least 10 more by February 2005, using a franchise model. Last year Sofmap announced a strategy to go deeper into the used-PC market, and is saying that it will increase volumes to around 20,000 per month. Ikari points out that running 50 or more stores costs money, and if you can get similar volumes out of bulk trading contracts, why go retail? He believes that Sofmap will have a hard time making money from the expansion.

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But this doesn't mean that Anchor is walking away from the consumer PC market. The company believes it can counter Sofmap's push by focusing on its existing customers and strengthening the goodwill earned through its guarantees and reasonable prices. "User Community" is a phrase heard often at the Anchor headquarters these days, and it indicates the emphasis on customer relationship management, particularly on-line. Anchor figures that the battle will be won by careful delivery of products that meet customer expectations, and since it doesn't have the same sales costs as competitors, it can place its discretionary expenditure into this area. The idea is to focus on opinion leaders on bulletin boards, and have them evangelize the Anchor service and quality value proposition.

Probably a bigger threat than an Akihabara retail chain is the recent trend for manufacturers to take back control of their used products. For example, Ricoh now sells used copiers, complete with maintenance contracts, in China. Still, Ikari sees gaps that will give Anchor room to grow for a few years yet. Independent buyers in countries such as Thailand and Myanmar still send him orders for three containers of 800 photocopiers each month.

Then, of course, there is the diversification strategy. Among Anchor's 80 different equipment lines today are exotica such as hospital operating tables, dentistry equipment, x-ray machines, industrial robots, NC lathes, injection molding machines, amusement machines, and sports equipment. I believe Ikari is right in saying, "Not even the most dedicated leasing firm or manufacturer can offer the foreign bulk trader a comparable one-stop shop for Japan's electrical machinery."

Going Public

Anchor has been enjoying steady growth and profits for several years, and thanks to the NTT relationship and other sourcing tie-ups, the quality of used goods coming out of its partners is better than ever--propelling sales at the rate of 20 percent growth year on year. Revenue last fiscal year (FY2003) was [yen]1.7 billion (US$15.45 million), and profit was [yen]180 million. Ikari feels that if the global economy holds up, he can expect Anchor's financial results for FY2004 to be close to [yen]2 billion in sales and [yen]200 million in pre-tax profit--sufficient to qualify the company for an IPO. Indeed, when pressed, Ikari predicts that his company might go public as early as the end of 2006. In the meantime, he doesn't need the money, thanks to a generous bank overdraft, but is willing to talk to foreign firms interested in a strategic relationship.

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Connecting with Anchor

Anchor invites enquiries from foreign traders in electrical machinery and PC/OA equipment. Contact can be made through the International Sales Department, by email at [e-mail].