JAPAN: NO LONGER A BUSINESS MYSTERY

By Ron Ito

Among the advanced nations, Japan is one of the largest markets in the world and the most important market for business expansion on a global level. Japan is a unique country. Although there are many reasons, the biggest reason for its uniqueness comes from Japan’s environmental and historical background.

Until 1868, Japan had been a closed country and had no international trade at all to protect their own culture and government from the influence of overseas nations. Japan had excellent environmental conditions for a closed-loop system for over 300 years because the country is completely surrounded by oceans and seas — especially the sea of Japan which has high waves and many typhoons that actually protected it from overseas aggression (including the Mongol aggression in early 13th century). As a result, Japan developed a very unique culture and a very uniform society which is quite different to any other nation in the world.

When Japan opened the country in 1868, the government was so frightened by the huge culture gap between Japan and western countries, that it decided to make every possible effort to industrialize the country (the government believed that Japan could be taken over by other countries otherwise). Until that time, Japan was agricultural country (almost 80% of the population were farmers in 19th century, now there are less than 5%).

Japan’s industrialization progressed very successfully thanks to the very uniform national character. Since Japan has almost no natural resources, the government decided to concentrate on using human resources only. As the result, Japan started to import all necessary natural resources from outside the country, make the products inside then export the products to obtain foreign currency, which was the only way to survive.

Needless to say, Japanese products that had good marketability were limited to mass-produced items simply because Japan had little educational background and history for modern western culture and products. Education (especially education for innovation) requires a long time, so Japan made every effort to improve the technologies for production control and quality control, instead of basic research and development. In other words, Japan (must be) started by taking over new ideas from outside, copy (or learn) the technology, produce mass-produced items and export them.

Even today, many American and European companies claim that Japan copied everything. It is true because it was the only way for Japan’s survival. Of course, Japan is now appreciated as the country having a high level of technology but more than 90% of original ideas still come from outside Japan. In Japan, there is a word “experience instead of learn” which means “copy before thinking” or “copying is the best way of mastering.”

Traditional ways of doing business in Japan

Because of the cultural and historical gap between Japan and overseas nations (including language problems, most of American and European companies started business by finding suitable partner like a trading company. There are many points in the Japanese system that overseas people do not recognize. First, you must remember that Japan is a country that can survive only by export. The Japanese government (and industries) have been doing everything to protect the export business rather than import (except natural resources).

Any products exported from Japan are not subjected to any consumption tax. However, everything imported into Japan are subjected to consumption tax based upon CIF prices. There are hundreds of official or private associations or organizations formed by companies involved in each kind of industry (many closed-loop systems) to exchange information and to put pressure on the government to protect their interests (almost all of big Japanese industries established close political and human relationships with the government by making huge political contributions to governors).

Japanese customers never pay cash for what they buy. The most common payment term is a 120 days credit note issued 40 to 60 days after delivery (this system can function in a closed-loop system).

The number of technical people is very small. For instance, there are only two universities in Japan having courses for electro-optics/laser technology. Most of Japanese industries start from educating young people inside their companies. Most trading companies have little human resources having high-level education for specialized technologies. To do business with many big Japanese industries, having the business checking account called “Koza” is required. Without the Koza, nobody will sell a product directly to the customers. There are thousands of small trading companies having some political or human relationship with such customers who have a Koza, and the customers may request you to do business through such trading companies (often they are subsidiary of the customers), and you must pay at least 10% commission to use their Koza.

As you can see from the above examples, import business has many visible and invisible barriers. In most cases, Japanese trading companies hesitate to explain all these things because they are so complicated. They usually simply say that “Japan is special”. However, you must remember all the basic systems that make your business difficult to do in Japan.

The biggest disadvantage I believe is using a traditional trading company as your business partner. Most Japanese trading companies think of everything on a “product level” only. They are always looking for something new and unique. When they find those product(s), everybody says “we are No.1 in Japan” (they usually prepare a very attractive company profile so that many overseas companies believe what they say).

Actually, they are “Agency collectors”.

They usually ask you to give them “exclusive agency” status, but please remember that “Nobody can cover the entire Japanese market alone” as Japan is quite a big country and narrow from North to South, having four main industrial areas, each having a different culture and different behavior.

Because the trading companies must spend a lot of money to introduce your product (sending their sales staff to your factory for training, translate the catalog and operation manual into Japanese, prepare Japanese catalog, purchase the demonstration product, prepare the demonstration space (50 square meters space to rent costs minimum 2000 US dollars per month in Tokyo), borrowing money from a Bank (as they have to pay you 100 or 120 days before they can get cash from customer), etc., they always (must) try to recover their invested money as soon as possible. The only way to do that for them is to set their selling price of your product in Japan almost double or even 3 times compared to the price you are selling it for in your market. In fact, the new-to-market American product having the selling price in the U.S. of one million dollars will usually have a 2.2 million dollars selling price in Japan.

Now, you have two big problems.

-Because of the high price, few customers can actually buy your product. The sales of the trading companies may be OK but you will be disappointed with the result. You will probably start thinking either one of the two things, “You selected the wrong partner” or “Japan is special”. As the result, you will probably give up about Japan or try to change your agent, and almost always your new agent will do the same thing. Nothing will change.

-Usually in 3 to 6 months after your agent introduces your product into the Japanese market, all of your potential Japanese competitors will know your product and price. When they find that your product is sold at a 2.2 million dollars selling price then they will naturally think to develop the same product with a 1 million or 1.5 million dollars selling price. They do not have to spend the money for R & D; because they can obtain all the necessary information by buying one unit from your agent. Maybe six months or all of your potential Japanese competitors will know your product and price. When they find that your product is sold at a 2.2 million dollars selling price then they will naturally think to develop the same product with a 1 million or 1.5 million dollars selling price. They do not have to spend the money for R & D; because they can obtain all the necessary information.

How to develop a successful business

I know many American and European executives who say “disregard Japan”, but I cannot agree with that idea, because I know a lot of American and European companies doing successful business in Japan that are taking a leadership role worldwide. If you would like to take a leadership role in your business field worldwide, then you must challenge the Japanese market from the beginning.

Many overseas people often forget the most important point that “Specialized product can be marketed and managed only by specialists.” The important point is that specialists include not only technical specialists but also marketing and management specialists.

Now, I would like to describe the ten important rules to develop successful business in the Japanese market.

1) Start by deciding your target and what you really want to do in Japan. International marketing, Multinational marketing, and Global marketing are three different things. Decide which one you want to do?

2) Do not try to sell your product. Sell the total solution for the customers You must start from your market research to realize what kind of problems or requirements your customers in Japan have. The problems vary from country to country. To clarify the point, you must spend the necessary time and make many contacts through different channels until you can find the professional person or company who can evaluate the problems and give you the ideas or solution. Most important is to select the professional person whom you can trust and enjoy communicating with.

3) “Product Level” communication covers only a part of your business. In most cases, communication between you and your agent covers only product level subjects, such as specifications, delivery, price, claims, etc. These subjects are very important of course, but you must communicate with your partner about the market environment, difference in culture or systems, customers behavior etc. In other words, you must select the partner who can communicate with you on all necessary levels.

Do not select your partner from their company profile or past record only. It may be a good tool for your decision-making because you can see that they have good record in the same market. However, please remember that “A skillful person is always the busiest person” and maybe the company cannot spare the right person for your business. Make sure the individual person(s) can actually spend time and energy on your product.

Make sure of their strategies (including pricing strategy, service/maintenance strategy and marketing/sales strategy). Most overseas companies do not know about the prices actually sold in the Japanese market. Do not forget that you are the company who wants to do business in Japan. Trusting your partner does not mean “paying no attention to what your partner does”. A partner is the person (or company) with whom you can communicate. Communication-level is the most important point for your business.

4) Selling the final product is only one of way. Think about others. It is usually good to start just simply selling your product in Japan. However, do not forget about other alternative ways. Joint venture, licensing and some other ways may function better in many cases. For instance, if your product is software which works for an IBM PC only, you will automatically loose a minimum of 30% of the total potential market in Japan because the biggest supplier of Japanese PCs is NEC which is not always compatible with IBM. However, it would be difficult for you to develop the model for NEC PC without having the right partner who could help you to do so under a joint-venture or licensing arrangement.

5) Select your partner who has a similar size and specialty as yours. If your company has 10 people and specializes in laser technology, try to select a partner in Japan having a similar size and specializing in marketing and selling laser products. All areas of Japanese societies and organizations have vertical and triangular constructions. Bigger companies have more complicated systems. If you are an independent company, do not select your partner who is working in a “Keiretsu”(affiliated) company. Please remember that there are hundreds or thousands of small to medium independent specialized companies in Japan looking for overseas partners to work with.

6) Spend your time and money at the initial stage. When overseas companies appoint their partner in Japan, they say “we will give you an agent discount. Do everything by yourself. Prepare Japanese catalog. Send your engineer to our factory for training. Buy a demonstration unit.” Then, your partner (as described before) spends a lot of money, time and risk to develop your business in Japan, but the result is that your products have less marketability.

Why don’t you say to your partner, “We want to take the leadership in Japan. Let’s think together about how much we have to do, how much time and money is required, and how we can share the risks and profit.” Why do you ask your partner to buy the demonstration unit? Your partner is the person to work on behalf of you. Don’t give them such risks. Your partner should be the most important person (company) whom you can trust and leave to cover the most important market for you. Let your partner use the demonstration unit free. Pay a minimum half of the cost for the catalog or manual that your partner prepares. Think together with them. Exchange ideas.

When Japanese companies try to export their products, they prepare English catalogs and manuals at their expense. They prepare demonstration units at their own risks. They always try to know and understand everything their partner does overseas. As the result, (as you know) many many Japanese companies are taking a leadership role everywhere in the world.

7) Ask your partner to sell not only your product but also your company’s name and policy. Any products have life and any products can be copied. However the name and the philosophy of your company cannot be copied so easily. Think about the companies doing successful business in Japan such as Taylor Hobson, Carl Zeiss, Hewlett Packard, IBM etc, all of them are selling their company and philosophy. They are always trying to let their customers understand and appreciate what they think and what they do. Many American and European companies, who tried to sell their products only and let their partner in Japan prepare catalogs showing the product name and specifications only, have failed.

8) Select the best person to take care of your partner to keep good communication and mutual understanding. Communication is the most important key for success. Select the best person (or yourself) as the person to take responsibility for communicating with your partner. Communication skill is different from engineering skill or marketing skill. Do not give up until your partner can think and act as you expect (in fact, there is a lot of things you can learn from your partner also). Do not terminate the business relationship with your partner by their sales record. Terminate the business relationship when you judge that you cannot keep good communication and understanding level with them.

9) Think “Networking.” There are companies having 100 good salesmen trying to do everything by themselves, and there are companies having only 5 salesmen each having 100 networking channels.

As described before, nobody can cover an entire market alone. There is a specialist in fiber-optics, but there are no specialists covering all optical technologies. When you try to select your partner, check how they try to sell your products. If they say “we can do everything by ourselves”, take care. If they say “we know all of the key players to sell your products and have a good relationship with them”, they are probably the best partner for you.

10) Use many official and private associations as your contact point There are some government level organizations helping you export to Japan. Some famous organizations are JETRO (Japan External Trade Organization) and MIPRO (Manufactured Import Promotion Organization) sponsored by MITI. JETRO and MIPRO are good contact points for you to know general information about markets. However, their information is usually not good enough for selecting your partner. Use your local contact or some private associations in Japan, such as IBCC, JEPIA and OEPA all having members selected from independent specialized companies who are looking to start communication with potential partners outside Japan. If possible, start from “Your Japan Liaison Office” instead of through an “Agency agreement”

Last of all, (adding to the ten rules described above) I would like to make one suggestion. An effective way of solving most of the problems described earlier is starting your own Japan Liaison Offices, which is now becoming more practical and effective than having your sales agent. Your agent must be the person (company) thinking and acting 100% on your behalf. You are the person (company) who wants to develop successful business in Japan.

Ask your partner to work as your Japan Liaison Office so that you can introduce both your company and product to Japan from the very beginning. Your agent will realize how important keeping good communication with you is. You can understand Japan and your partner much more effectively rather than leaving everything with your agent.

As long as your partner works 100% on your behalf as your Japanese Liaison Office, you can always discuss with them how to establish the strongest marketing and sales network, how to select the best people who can talk directly with your potential customers on each application level, and can sell your products directly to them so that you can keep very competitive prices. You can always discuss what the real problems in Japan are and how you can help your office in Japan solve the problems.

Of course, there are many know-hows and rules to realize this concept, but as far as your partner understanding what international business is, a Japan Liaison Office has many big advantages for both yourself and your partner. See what tomorrow brings.

Ron Ito is an independent Japan/U.S. business relations advisor based in San Jose and Tokyo.