By Ken BelsonDespite Downturn, Pachinko King Thrives in Japan
TOKYO Chang Woo Han has never had it so good. As the world's second-largest economy struggles to regain its footing, his business, running Japan's largest chain of pachinko parlors, is growing by leaps and bounds.
Han is the founder and chairman of Maruhan Corp., which presides over a 121-shop empire spread from Hokkaido to Kyushu that took in ¥76 billion ($4.8 billion) last year from the players who pump money into pachinko, the vertical pinball game that is popular in Japan.
While bankruptcies have soared in Japan, and deflation has chewed into many companies' profits, Maruhan's sales have almost tripled since 1998, and Han expects them to double again by 2005. Next year, he wants Maruhan to become the first pachinko chain listed on the Tokyo Stock Exchange.
Pachinko, at best a rare curiosity in the rest of the world, is a big business in Japan, with total revenue of about ?8 trillion a year, as much as that of Japan's five largest automakers combined. But it has been highly fragmented, with only a handful of companies achieving even a 1 percent market share.
It was long regarded as recession-proof, but in the current downturn it has suffered along with other entertainment businesses in Japan.
Rising unemployment and falling wages have left consumers with less pocket money to pour into a game in which players can lose $100 or more in a matter of minutes.
Younger Japanese have been drifting toward video games, movies and sports like skiing and surfing.
The sour economy, falling land values and the growing risk aversion of the nation's struggling banks have combined to drive a growing number of mom-and-pop operations out of business, not just in pachinko, but also in the similarly structured tavern and karaoke-bar industries. Even healthy operators have a hard time obtaining bank loans for expansion.
These misfortunes, however, have been a boon for the biggest companies in the industry, like Maruhan. As the bubble economy collapsed, Han saw potential for larger parlors and lined up financing to grab store space in busy central locations as it became available.
With ¥8.7 billion in loans, he built multifloor emporiums that lure customers with no-smoking sections, free parking and, crucially, improved odds of winning cash. The cash flow from these successful, large parlors has helped Maruhan add more locations.
It has also enabled it to diversify into movie theaters, bowling alleys and a doughnut franchise.
"Even if our industry faces a crisis, not all of us will fall into it," said Han, 72, prosperously turned out in a well-tailored gray suit with gold-tinted pinstripes, gold cuff links and a gold watch for a recent interview.
His bubbling confidence makes him unusual here in more ways than one He is also a rare example of a corporate leader from Japan's ethnic Korean minority, which is widely discriminated against.
To play pachinko, which originated in the United States in the 1920s, but never caught on, a player buys a supply of steel ball bearings, slings them to the top of the machine and watches them tumble down, deflected this way and that by dozens of metal pins.
When some disappear into holes in the playing board, new balls are spit out from the bottom and can be played or redeemed for gifts or cash.
The positioning of the pins on the board and the number of balls returned vary from machine to machine. Parlor owners adjust the memory chips in the back of the machines to fine-tune the pay-out rates.
Committed players often line up outside their favorite shops before they open for the day, hoping to secure what they believe are the "hot" machines.
But the parlor owners make higher profits from more casual customers who want to be pampered as much as they want to play the game.
Parlor owners have experimented with amenities like having refrigerated coolers so that housewives can stow groceries and play on their way home from shopping.
Where older players were happy to win items like golf balls and canned corned beef in small shops, the bigger new parlors try to attract younger players with prizes like leather handbags and Swiss army knives.
"The service is what makes parlors different - whether it's clean and you take your kids there and so on," said Takashi Kadokura, who tracks the industry for the Dai-Ichi Life Insurance Economic Research Institute.
As Japan prospered, pachinko thrived, and Han did well enough in the 1960s to branch out into another booming industry, bowling. At one time, he owned the country's largest alley, with 120 lanes.
Han has one last goal for his business taking it public. "Just to survive is meaningless," he says. "We have to be winners."
Pachinko operators are only just starting to win the respect of Japan's business establishment, despite the industry's immense cash flow.
But the growing sophistication of operators like Maruhan is winning more attention.
"Big companies are now coming in to run parlors," an industry expert said. "The business has a perceived cash value and the economy is not performing well. So as the bigger chains move into the business, it's become socially responsible."