Sunday 8 December 2019

WeWork's escape plan 'simple' - it's buried in books at Tokyo office

Embattled office-sharing company learning from Japan success story

Must work: The company has to make better use of its data
Must work: The company has to make better use of its data

Pavel Alpeyev

Masayoshi Son stood on stage in Tokyo this month and told sceptical SoftBank Group Corp investors that making WeWork profitable is not only possible, but will be "simple".

Driving that confidence is WeWork's Japanese unit, which is already in the black and will be the springboard for a new service that could help the embattled office-sharing company.

While WeWork's board was still deciding in late October between SoftBank's $9.5bn (€8.6bn) rescue package and an alternative from JPMorgan Chase & Co, Mr Son spent two full days at the unit's head office in Tokyo, poring over the books, according to people familiar with the matter. Even before the deal was approved on October 22, SoftBank was working with WeWork Japan on a subscription service called Passport that it plans to introduce worldwide, the people said asking not to be identified because details aren't public.

"Why do we think that WeWork is neither a quagmire nor a sinking business?" Mr Son asked the audience at an earnings briefing earlier this month, before laying out his plan to cut costs and freeze growth at the co-working giant. "Japanese operations are in the black."

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Altogether, Mr Son has paid more than $10bn for an 80pc stake in WeWork, which is now worth less than half of that. The plunge in valuation from $47b to less than $8bn and the implosion of its planned initial public offering in September comes at an awkward time for the Japanese billionaire, who is pitching investors on a second $100bn investment fund. Reviving WeWork based on its model in Japan, one of only two markets where the company generates a profit, could help him counter a growing list of detractors.

On Friday, WeWork's executive chairman Marcelo Claure, outlined a five-year turnaround plan in a meeting with employees, with themes from the Japan strategy. He said the target is to become cash-flow positive by 2023 and geographic expansion would come in a measured and profitable way, according to people familiar with the matter. WeWork also introduced new leaders, including former CEO and chairman of Publicis Groupe Maurice Levy as interim chief marketing and communications officer, the people said.

The new Passport service would give tenants flexible use of desks, community spaces and meeting rooms, amenities for which visiting customers currently have to pay extra. The service is a work in progress, but if adopted, WeWork aims to set aside a certain number of desks at all locations for Passport users. The move is aimed at increasing occupancy, the key to making locations profitable.

WeWork Japan is also sharing data with SoftBank in a bid to better understand how its spaces are used. Staff at the two companies have met weekly to analyse desk utilisation heatmaps and brainstorm about possible applications of machine learning in what is internally known as Project Pluto.

Mr Son, who has said his investment strategy is to focus on companies powered by artificial intelligence, is eager to move WeWork beyond its real-estate beginnings. He said that he's long pushed WeWork to make better use of its data, but progress has been slow. The company will now begin experimenting with AI in Japan and could be ready to introduce it more broadly in as little as six months, Mr Son said.

From the beginning, Japan was different from other WeWork markets. The New York-based company needed a local partner and co-founder Adam Neumann originally courted Mitsui Fudosan, one of the country's biggest developers. After executives toured WeWork's US operations in 2016, the Japanese company said thank you, but no thank you, and started its own co-working service in Tokyo the following year.

Mr Neumann entrusted the job of breaking into the market to his brother-in-law and WeWork employee No. 5 Chris Hill. The way Mr Hill tells the story is that he landed in Tokyo with a suitcase, $10m and no real-estate connections. (He also brought his nephew Sam Robinson.) Over the next few months, with a core group of employees working out of the living room in his posh Roppongi Hills residence, they had a win - Mori Building agreed to lease two floors in its Ark Hills complex and a penthouse space at a recently opened building called Ginza Six.

WeWork Japan was founded in 2017 as a 50-50 joint venture with SoftBank. The Japanese company was initially largely a silent partner and Mr Hill's familial connection to Mr Neumann shielded him from interference from New York headquarters, allowing WeWork Japan to build and price spaces differently.

Mr Hill was particularly strict when it came to giving discounts. While other regions frequently gave as much as 30pc off to lure clients, Japan's reductions rarely reached 10pc, according to one executive. That created tensions with New York, which had to explain to clients why using WeWork in Tokyo was going to cost them more. But the discipline paid off. The Japanese business had the highest margins and within 20 months had expanded to 21 locations across five cities.

It remains to be seen how far Japan's success can be reproduced in other markets. WeWork entered Japan when office vacancy rates were near a decade low. The supply has tightened since to around 1pc, a level not seen since the 1990s, allowing landlords to raise rents, while requiring a deposit of as much as a year's rent.

While Mr Son has ordered a halt on new building developments, WeWork Japan still plans to open three new locations next month and another seven in 2020. Son said occupancy rates for 15 Tokyo locations average over 90pc, though the number is considerably lower for neighbouring Yokohama and offices in west Japan.

"What has been unique about Japan is that they got to a high tenancy ratio very quickly and didn't over-commit in terms of growth," said Chris Lane, an analyst at Sanford C. Bernstein. "The element that isn't unique is that this business is scalable at high occupancy. In the rest of the world, they need to stop expanding and let the spaces fill up and then they will become profitable too." (Bloomberg)

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