Dentsu Japan admits 'inappropriate transactions' in Toyota overbilling scandal

Arvind Hickman
By Arvind Hickman | 21 September 2016
Dentsu's digital business in Japan has overcharged key client Toyota.

The Japanese arm of Dentsu faces a corporate relations crisis after admitting it has overbilled long-standing client Toyota for digital work, AdNews can reveal.

The allegations, shared to AdNews by industry sources on the condition of anonymity, relate to Dentsu's Japanese performance marketing subsidiary DA Search and Link (DASL).

The irregularities only relate to operations in Japan and have no link to any other part of Dentsu Aegis Network, including its Australian group. They also don't involve Toyota Corporation in Australia, which is served outside of Dentsu Aegis Network by independent media agency The Media Store.

At the heart of the allegations is that DASL has been overbilling Toyota for at least five years or more. Although the exact scale of the problem is unclear, it is believed to be serious enough that several Toyota brands have either fired or are reviewing Dentsu digital assignments in Japan. 

Toyota is one of Dentsu’s most important and longest-standing clients with business relationship that stems back to the WWII era and the owners of both businesses are said to be good friends.

In response to the allegations, Dentsu Inc told AdNews that while it cannot provide specific details in relation to Toyota, it did confirm there was an issue with its digtal media division.

In an email statement, a Dentsu Inc spokesperson said: “We can say, however, that there were some inappropriate operations related to digital media business transactions which have already been reported to the clients concerned. We are currently in consultation with them regarding any further steps that may be required.”

AdNews understands that after learning about the irregularities, Toyota began a broader sweep of buying activity across traditional media in Japan and found other instances of overbilling.

AdNews has also been told the practice may have affected another blue chip client.

Sources that work closely with the digital arm of Dentsu Inc have confirmed the agency has begun informing a number of major clients ahead of the scandal breaking publicly.

If cases of overbilling are found to be intentional, it could rock Dentsu’s reputation in Japan and lead to some of its other blue chip clients, like Sony and Honda, to investigate billings and make sure correct practices are being followed.

After MediaCom was caught misreporting its TV audience figures in Australia it lost key clients, and transparency over media agency rebates and remuneration has been in the spotlight recently after the US ANA released a damning report on media agency billing practices.

The fact that an organisation as large and seeming untouchable as Dentsu could face a similar backlash raises questions about how widespread such practices are.

An industry source believes Dentsu will try to contain any reputational damage to within Japanese borders, but it could have a “phenomenal impact” in the Japanese market.

A culture of trust

Japanese business culture is heavily based on trust and long-standing relations. Dentsu's top brass, including president and CEO Tadashi Ishii, are known to be very close with Toyota leadership and CEO Akio Toyoda.

An industry source, who knows the inner workings of the network in Japan, told AdNews it is “completely surprising” and “out of character” Dentsu would intentionally overcharge such an important client, but detection could be difficult simply due to the scale of the companies involved. 

Another senior agency source familiar with the Japanese media and advertising industry says agency tenures are typically so long, up to several decades as in the case with Toyota, the client-agency relationship becomes “extremely blurred”.

“I have worked with individuals (in Japan) where I genuinely haven’t known if they were the client or the agency,” the source says. “It’s a recipe for transparency carnage, for a start. Trust is at such a high level that the opportunity to do something and not get caught is very high.”

In Japan, there are very few litigation lawyers because it is rare for corporations to go to court as culturally it is extremely dishonourable to sue someone. Japan has 29 lawyers per 100,000 people compared to 377 in the US and 91 in relatively litigious-free France. This is despite a concerted government plan to increase the number of lawyers over the past 15 years.

“When you roll up this culture of incredibly long-standing relationships, a culture whereby you don’t want to accuse anyone of anything and then you add the fact that the way they do business…particularly in media and digital media, it’s up to the agency to charge whatever they want,” a source added.

“The kinds of things they talk about in this market and the US with kickbacks, commissions and taking money off the top and stuff; what you see in these markets is infantile compared to the practices that are in place in Japan. It’s the birth of those behaviours.”

Another source familiar with the Japanese market says what is "surprising about this case is that it is a surprise at all" as such practices would be considered part of business when dealing with “incredibly powerful” agencies.

A media juggernaut

Dentsu holds a unique position of dominance in Japan, the world's third-largest ad market. Dentsu Inc claims it controls 25% of ad spend in Japan, approximately ¥1.54 trillion (A$20 billion). This is well above the second-largest player Hakuhodo, which controls around 10%, although some sources claim the gap is wider.

In its 2015 annual report, which had an adjusted reporting period of only nine months, Dentsu reported consolidated revenue of ¥664.9 billion and gross profit of ¥643.3 billion. Japanese revenue is about 49% of the whole group.

Dentsu is not just an ad agency and media network, it also has stakes in major newspapers and TV networks. It played a role in founding commercial TV and radio in the country.

The group, which has 7,000 employees in Japan, has a near endless list of subsidiaries that include media buying and planning, creative agencies, digital, PR and even has a hand in TV and film productions.

It owns one of the largest sports broadcast and marketing agencies in the world and will act as the exclusive marketing agent to the Tokyo 2020 Olympic and Paralympic Games. They are also Olympic broadcast rights holders across Asia and have a strong foothold managing media, sponsorship and broadcasting rights for a number of sports, including athletics and football in Japan.

Dentsu also owns about a third of Video Research, the Nielsen equivalent that provide Japanese TV ratings, and has drawn criticism from within Japan over exerting too much control over what is reported by a fearful media.

A cornerstone of Dentsu's future plans is to grow its digital business from 27% of gross profit in FY2013 to a forecast of 35% or higher in FY2017. In its 2015 annual report, Dentsu claimed this was partly down to key digital companies, including Dentsu CCI, NEXTAGE Dentsu and DASL.

It's now likely that those plans, particularly within Japan, will be questioned. But the more immediate concern will be limiting any fallout from current clients.

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