Dentsu’s planned investment in Leo Burnett may prove a pathway to achieving the Japanese agency’s cherished goal to become a major international player, alongside WPP, IPG, and Omnicom. It may also prove significant in maintaining Dentsu’s unquestioned dominance of the world’s second largest advertising market.

 Yutaka Narita, Dentsu’s president links the two, "If we miss the opportunity now to globalize our business, we will have to be content with being the No. 1 Japanese local agency. We would then run the risk of losing our advantage in the domestic market."

 As the world’s major advertisers increasingly seek to work with global agencies, both WPP and Omnicom have added muscle to their Japan operations. WPP partnered with Asatsu in August while Omnicom bought two lesser Japanese agencies. Similar pressures are building up within Dentsu’s relations with its major Japanese clients.

 At home, Dentsu has dominated Japan’s advertising industry for decades. Twice as big as its nearest competitor, Hakuhodo, it regularly buys over 20% of all media, including 40% of prime time TV. Most major advertisers are Dentsu clients, and the agency has strong links with government and the bureaucracy. Yet despite the power, privilege, and pots of money, achieving stature internationally has proved a humbling experience for Dentsu. In 1997, on a non-consolidated basis only 15% of Dentsu’s US$ 14.4 Billion billings came from outside Japan. And that includes all of DYR. A scant return on an investment approaching US$ 1 Billion over the past 15 years.

Though negotiations have still some way to go, Dentsu hopes a new global partnership with Leo Burnett to augment its existing relationship with Y&R. "We are looking for a global partnership," said Nobuo Momose, a 66 year-old executive VP of Dentsu Inc in Tokyo. And that should enable to double the international share of its billings to 30%, which he sees as the minimum for Dentsu to join the top table.

According to informed agency sources, Dentsu’s investment, which would not be reciprocated, could start at 10% but might later rise as high as 20% or 25%, with a deal finalized by March 1999. But whatever the figures, neither a merger or takeover is not on the cards. "We respect each other’s independence and have never discussed M&A," said Momose. "We are pursuing a new kind of alliance, a structured, flexible relationship."

Burnett’s attraction is four fold.

The two agencies share many clients, including Philip Morris, McDonald's, Procter & Gamble, Coca Cola, Nintendo and Disney. "If Dentsu is to operate as a successful multinational agency, the client roster is very important. It should have not only major Japanese clients, but also prestigious local clients. If we have such clients, it will stimulate people working in our agencies," Momose says. Winning major Western clients outside Japan has proved almost impossible for Dentsu. Only one, Nestle, works with Dentsu across Japan, Asia, Europe, and North America. Hopes are that combined forces will help each win more business from these, and other multinationals around the world.

Then there is the need to serve Dentsu’s Japanese clients abroad. At home, Dentsu handles many competing clients. For example, it handles consumer electronics for Hitachi, Toshiba, Matsushita (Panasonic), Sony, NEC, Sharp, Sanyo, and JVC, among others. Auto clients include Toyota, Honda, Subaru, Daihatsu, Yamaha, Mercedes, and Ford. " There are a number of clients who would like to utilize Dentsu’s services not only in Japan but also outside. And in some countries there are strict rules about account conflict, so we need three separate channels - DY&R, our own network of Dentsu agencies, and, if all goes as we would wish, our new relationship with Leo Burnett," explained Momose, who declined to cite any specific client names, saying that such talks " were only just beginning in earnest.".

Another attraction is Burnett’s 49% stake in Bartle, Bogle, Hegarty. "We hope very much to be able to work with them, but nothing has been finalized yet," said Momose.

And fourthly, "The three agencies [Dentsu, Y&R, and Leo Burnett ] share a common corporate culture and philosophy, the emphasis on human values, and long standing client relationships, and so there are strong similarities between the outlook of people working in each company," says Momose. Even so, Momose says all three will continue to operate separately, pursuing their own agendas.

Despite Burnett’s global merits, it is in the USA that Dentsu initially has the direst needs. Account conflicts between Dentsu and Y&R have often blocked DY&R from taking Japanese business. Though it is the key international market for many Japanese marketers, and accounts for 35% of global ad billings, it only provides around 2% of Dentsu’s billings outside Japan.

As recently as 1996, Young & Rubicam sold its 50 percent stake in the Lord, Dentsu Los Angeles office to Dentsu. One reason for the change was because Dentsu's efforts to seek automotive accounts in the United States had been hindered by Y&R's relationship with Ford. Paradoxically, Ford fired JWT in Japan earlier this year to join most of its Japanese rivals as a Dentsu client in Tokyo.

Leo Burnett offers comparatively less conflict. "They are particularly strong in packaged goods," says Momose of Burnett, adding that there are many opportunities for Burnett’s network to handle Dentsu’s clients overseas. But whether General Motors would welcome Honda, or another Japanese rival, on Burnett’s roster remains to be seen

Even so, Momose quickly rejects any suggestion that ties to Y&R could be weakening. "We are very happy with our relationship with Y&R. In DY&R we have both good clients and good people. We value that relationship, it is very important to us," said Momose who added that Narita and Y&R’s Georgescu had discussed the proposed new partnership in detail and that Georgescu had spoken highly of Burnett and recommended them as a suitable additional partner for Dentsu.

Though it is not a name to conjure with in the USA or Europe, DY&R is a success in Asia where most of its US$1.3 Billion billings (1997) emanate. Across the region, including Japan, DY&R ranks sixth after Dentsu, Hakuhodo, McCann, Asatsu and Tokyu. Part of DY&R’s success is down to a client mix split almost equally between Japanese, Western multinational, and local clients - a factor clear to Momose that his predecessors had overlooked.

Japan’s recession adds urgency for Dentsu to achieve its international goals. Overall billings may be down over 10% this year and could drop further next year. While Western agencies are quick to cut staff numbers, Dentsu continues to honor the traditional Japanese promise of life-time employment it makes as new recruits join. During an earlier bleak spell in Japan, Dentsu watched its net income drop by 64% to US$23,951,00 from 1993 to1994 whilst keep staff numbers almost unchanged at over 5,000 in the main agency, plus over 3,000 in Japanese subsidiaries. Future growth in revenues must come largely from overseas since both market share gains and revenue growth in Japan will be difficult.

Of course in size alone, Dentsu already ranks high - 1997’s Gross income of US$ 1.98 Billion ranked it fourth behind Omnicom, WPP, and IPG that year. Even so, gross income was US$ 1.4 Billion below Interpublic’s and, more importantly heavy dependency on Japan, once a strength, is now a structural weakness.