Japanese eikaiwas, like 19th century banks, rely on the trust of the customers

I wanted to take a break from the depressing diplomatic spat about Okinawa to talk a bit more about English teaching in Japan. Eikaiwa (EH-kuy-wa) is the general term an English-learning club as a business format here. It’s a business model that is still out there although it also seems to be quickly losing its credibility, if not its popularity.

I did this in my beginning times here in Japan, which is one of the reasons why I cut way back on blogging. I agreed to work with a judicial scriviner—I believe the term is—who had a struggling Eikaiwa, where it wasn’t really clear what his business strategy was for it. (A bit more on that some other day.)

Eikaiwa, I believe, is a unique phenomenon to Japan, and primarily driven by the need to employ working holiday visa students from countries that have a working-holiday arrangement with Japan. Primarily: England, Canada and Australia.

Although the old government here never quite came out and said, “look, we have these businesses going here because we need a place to set up working holiday students in exchange for these other countries letting our kids stay a year in theirs”, practically, that’s why the business is around and tolerated in areas where it is known to fall short.

If it weren’t for the young Japanese wanting to go abroad for a year, you wouldn’t be seeing very many Eikaiwa businesses in Japan.

A bit of this is the unfortunate (or not) realities of world linguistic geopolitics. English opens doors for non-native speakers throughout the world, but Japanese tends to commit you, well, Japan. So the people who learn English worldwide, and here in Japan, have a different set of motivations and rewards than the reverse.

There are then, naturally, a small but not insignificant number of young people who are ready here at age 20 to speak English in a foreign environment and travel the English-speaking world.

There are relatively few Westerners who have mastered Japanese to the point of working in Japan. And disproportionately, these are individuals where Japanese played a role in their upbringing—usually they had at least one Japanese-born parent.

So you have the awkward situation of a “business model” that really exists to serve a government policy end. But I think few people really stop to look at it this way.

These English conversation schools started out small in the years after Japanese were allowed to, and could, travel abroad freely. I think this would have been about 1966. So in the early 1970’s you see the first of what became the “chain” Eikaiwas appear. The precursor of the somewhat more transparent JET (Japan Exchange Teachers) program, a visiting teacher-aide program for Westerners, also began around that time.

In the Showa-era bubble economy here, the Eikaiwa concept grew, and a firm called Nova–using the same Eikaiwa model–got its start. After several years of apparent success, it began a rapid expansion in the 1990’s and 2000’s. By the time I arrived here in 2005, Nova was probably at its peak.

The Nova model, basically, relied on squeezing each party to to the business relationship in as many ways possible. The teaching staff, again, primarily working-holiday youngsters, were given a strict, assembly-line style working environment where the goal of teaching was confused with the directive to get the “student”/customer to “keep buying lessons”. These were usually bought months in advance, at an implied discount.

As I understand it, there was a certain moral ambiguity thrust into the work, confusing people as to whether the goal was supposed to be:

some didactic end, like a school;

or entertainment, like a hobby;

or simply, to get the customer to keep buying lessons.

I suspect the explanation was to try and make it all three. But if anyone knows anything about education, usually these are at least prioritized somehow. And emphasizing the third one usually raises suspicions. When non-profit, accredited colleges look like they just want money, it gets people looking askance. So why wouldn’t it for a profit-seeking school as a business?

Nova went bankrupt about two years ago—maybe October 2007—and I believe the former president of the company is under indictment here in Japan for some abuse of money or other fiduciary failing with the company’s finances. a judge handed the former president some time (3 1/2 years) for his misdeeds, but it’s not clear if he’s serving any of it yet.

What did Nova in, besides the overexpansion, is some of the more determined Japanese among the customer base started suing to get their money back–just like a bank withdrawal in many ways. No one likes to be taken for a fool, and the reality of Nova was that the customers were being asked to pony up a lot of money in prepayments (effectively, deposits). And then asked to trust that they would get the quality service they expected at some point in the future.

Like how a bank in the days before Federal Deposit Insurance would take a deposit based on the trust that the depositor could get their money back on demand or after a term.

An EFL teacher who blogs had casually mentioned the point about bank runs in a post last month, concerning another Eikaiwa chain that became the subject of internet rumors earlier in October. So I wanted to expand on the point more because I think it’s a great insight.

Prepayments, in the accounting world, are a liability, if you haven’t earned the money yet!

In other places, Nova had been compared by BBS commenters to a Ponzi scheme because the money on prepayments, the cash flow, was being used to fund current expenses (the bills, mostly salary and rent, that were due in the present.) But I disagree. The company’s “business model” didn’t work, and this was effectively hidden in the rapid expansion.

If anyone remembers the original Boston Chicken restaurant chain of the late 1990’s, this was the same idea. Rapid expansion covered for the failure to charge enough for the food wasted in the process of making “home cooked” fast food. Nova undercharged what it would cost to deliver a teaching service and still provide the profit-seeking owners with a return. Alternatively, it charged too much for “teaching” that really wasn’t. It was bad business.

Like banking, education is a trust business. Socrates had that down about 2,500 years ago, right? Socrates didn’t charge, but times were different then. But it made the point that the value has to be in the thing itself. And the whiff of a profit motive in the activity tends to erode trust. Yes, cover costs. But the Eikaiwas have been about profit over education.

Unlike the banks, the government here doesn’t step in to regulate them, because their actual service to the Japanese community, as an unregulated industry holding pen for working-holiday visa holders, is one of these unspokens.

Now it’s interesting that the mere rumor put out, about how solid any one of these chain Eikaiwas is, is enough to get people scurrying.