Japan = Profits for U.S. Companies (AAPL, AFL, COH, KO, MCD, SBUX, TIF)

by: Steven Towns

The USA Today on-line published an article late last night entitled, "Profit makes Japan America's No. 1 cash cow in Asia." It doesn't go too in depth but is an important topic nonetheless because it highlights the mistaken tendency to only think of China and India when talking about investing and doing business in Asia.

According to the U.S. Bureau of Economic Analysis, U.S. companies earned nearly $11 billion in Japan in 2005 versus $3.3 billion in China and $1.2 billion in India. I do want to give some credit to U.S. businesses in China and India. These earnings figures are not insubstantial by any means and if we were to review the annual earnings several years from now I'm sure all three will have grown but with China and India at a faster clip. With Japan however, it doesn't make sense to ignore a population of 120+ million that is increasing its propensity to spend amidst the second nation's longest economic expansion post-WWII.

Jesper Koll, chief economist at Merrill Lynch Japan, had the following comments:

In terms of profitability, Japan is the best-kept secret in the world.

They (the Japanese) are discerning customers. But once you've got him or her, you're king. You have to be the best. But if you are, you have infinite pricing power.

The business environment in Japan still has both "formal and informal trade barriers" in some industries such as agriculture, but PM Koizumi has made it a top priority to attract more FDI into Japan. Hopefully his successor will continue to support an open economy that promotes competition.

Among U.S. companies best known in Japan, Aflac (NYSE:AFL) is said to derive more than 70% of its earnings in the country, although its parent company is somewhat unhappy with the latest financials out of Japan. Coca-Cola (NYSE:KO) and Coach (COH) are reportedly in the 20% range. The article also cites the ubiquity of Starbucks (NASDAQ:SBUX), McDonald's (NYSE:MCD), and Kinko's.

Like Coach, Tiffany (NYSE:TIF) investors may be in for a surprise with the rising yen as local currency profits converted into U.S. dollars will be worth more. I believe McDonald's Japan reported a 99% drop in net income in its last quarter due to a change in its accounting reporting. Interestingly, compared to Starbucks it isn't able to exert the pricing power Koll mentioned.

The USA Today journalist forgot to mention the success of Apple (NASDAQ:AAPL). The Apple iPod is huge in Japan and dominates the portable music player industry. Music distribution via iTunes could also become a very nice cash cow for Apple for the foreseeable future given its current popularity, strength, and potential expansion to mobile phones.

Disclosure: The author of this post owns a long position in Coca-Cola (KO).