Embracing innovation: Case study

Seeking solutions: Incubating new businesses in mature companies

Embracing innovation

“Corporate venturing” adopts the role typically played by venture capitalists to connect companies more closely to emerging technologies. The experiences of Yukiya Nakagawa, who ran the first such fund for IHI, a 150-year-old industrial conglomerate that produces ships, jets and turbine engines, show how this more open approach to innovation can evolve in Japan.

In 2002, IHI sent 11 young managers to work with a venture group in Boston to explore the potential of over one hundred start-ups based in the US, Canada and Europe. By 2006, they had cemented alliances with seven of these firms by creating comarketing or joint R&D projects.

The team was making the right connections for IHI’s core businesses, precisely what they were expected to do. Yet it was not enough. Nakagawa, an engineer by training, believed what IHI needed was investments that could seed new business opportunities.

Engaging with early stage start-ups to support existing businesses “could not be considered efficient,” Nakagawa told PwC. Division heads with deep experience in their markets and a short-term market view on product lifecycles had little appetite for innovative improvements.

Thus four years into project, Nakagawa’s team moved out of R&D and operations and into IHI’s Corporate Planning Group. “We concluded that if you are going to start new businesses in a mature company, you have to do it as a headquarters function,” he said. Full support from top IHI executives released the venture team to go after various collaborative projects with start-ups on the sharp end of new, disruptive technologies, such as clean energy and desalination processes. They expanded their visits for research to 300 companies, some of which were focused on technologies well removed from IHI’s core competencies.

Among other investments, IHI would eventually make a US$ 25 million equity investment in a US-based battery-maker. They also signed a licensing agreement in 2011 that helps IHI access customers in Japan with new products that include, for example, hybrid engines for tugboats. Tugboats require massive power over a short time; rechargeable batteries are effective for starting up an electric motor and help decrease emissions to meet environmental standards on diesel fuel. “Our company did not realise that this new technology could be applied to our products, and now we have found a commercial market for it,” he said.

Looking back, Nakagawa, now a senior advisor for IHI, believes that collaborating closely in marketing and product development with start-ups in targeted technologies is critical for innovation success. This creates a relationship that can be more productive for both parties than a classic vendor relationship. “It’s impossible to find the embryo of new businesses by reading the literature or sitting in conferences. You have to go to the labs and the factories,” he said.