Market Entry Special

Back to Contents of Issue: November 2001


Entering Japan: Proceed with caution, but don't wait too long...

by Carolyn Sostrom

You've done some research and you have a product or service that you would like to bring to the Japanese market.

You're not alone -- according to statistics from the Japan Ministry of Finance, the total amount of foreign direct investment in Japan in fiscal year 2000 was US $28.2 billion, or JPY3.1251 trillion, an increase of 1.3 times over the previous year.

Japan may be the world's second-largest economy, but many consider it No. 1 in entry difficulty. Yet, with the yen declining, inflation, deregulation, and shifts from the traditional "one employer for life" atmosphere, there's never been a better time to enter Japan. Learn from the experiences of others and avoid the pitfalls that have slowed or prevented other foreign companies' entry into the Japanese market.

What companies do right
Companies that succeed in coming to Japan devote time to planning and acknowledge that it may take a while to make a profit.

"In the dot-com days, we saw companies that needed to report right away on their success," said Joe Moscato, general manager, Strata Works KK. "These companies come to Japan and they feel the need to show profit in the first or second quarter. Everything they're doing is geared toward the first six months." However, he noted, more mature companies will spend six months or more researching the Japanese market and gathering data, with a view to making a profit two to three years later.

If you don't have the will to invest serious money, manpower, and patience over a number of years, you should consider a market other than Japan, agreed Axel Lieber, Partner, Progress Executive Recruitment Tokyo. "It takes a while until you can reap the fruits of your investment, most likely longer than in some other countries, especially Western ones," he said. "Every market entrant has a steep learning curve to absolve. There are quite a few ins and outs to master, and a heavy-handed approach that aims to ignore those is a recipe for disaster. The Japanese counterpart has its own set ways and won't easily abandon them for you."

Companies that succeed in Japan determine what sets them apart. "If you are going to come to Japan and try to sell something that Japan is good at making, like cars, you have to think of your competitive advantage," Moscato said. "For example, Japan is the world's biggest manufacturer of motorcycles, yet Harley-Davidson does well here because it brings a different image." Also, some smaller companies have successfully competed against hardware or software giants in Japan because they can offer more products that are customizable. It may not topple the giant, but it certainly can make a profit for the small company.

Successful companies also seek appropriate legal counsel when setting up their business in Japan. "If your market entry strategy into Japan is via a straightforward distribution agreement, it may be possible to get by with home-based legal resources," said Charles Comey, a corporate partner with Morrison and Foerster's Tokyo office. "But for joint ventures, investments, acquisitions, and other transactions involving entity issues in Japan, it's prudent to retain experienced local counsel." Foreign companies forming, financing, or acquiring entities in Japan have a host of additional issues to address, from corporate and tax concerns to regulatory requirements and intellectual property matters.

When negotiating initial business agreements in Japan, don't be afraid to ask why, even if the issue seems like a long-standing policy in Japan, suggested Richard Bysouth, CEO, CareerCross Japan. "If you don't understand something, ask." Also, have a trusted Japanese colleague present who can explain things to you, he said. For example, when setting up his own company in Japan, Bysouth asked about a requirement in setting up office space -- whether the previous tenant absolutely must return the facility to its original state as traditionally required, even if Bysouth was happy with the changes. "It never hurts to ask about things, even if they are long-standing traditions," he noted. "But don't push the point so far that you upset people."

Successful companies also set realistic hiring expectations. "Companies that move into the Japanese market are used to a different mindset and a large labor pool," Bysouth said. "Foreign companies come into Japan looking for bilingual staff, and with this requirement they cut out 90 percent of the working population. Many Japanese people have an understanding of English but not enough for a work environment. Companies need to accept the fact that some of the qualities they valued in the States may not be as easily found in Japan." Companies that want to stay in Japan need a local workforce to show stability and commitment to the location, but they may need to depend on a few trustworthy, bilingual employees to make sure everyone knows what's going on, instead of expecting to hire a fully bilingual workforce.

Tim Ondo, president and COO, JCI Consulting KK, agrees that hiring the right people is key. "Many companies insist on cloning their ideal candidate back home, which is often a mistake, as many dot-coms found out the hard way," he said. "You're recruiting for success in Japan, not California. The winning formula here is very different."

The biggest concern a company should have when setting up a distributor-based operation in Japan, according to Scott Woodford, managing director of Executive Search International, is selecting partners who are going to make its interests and products a priority. "Japan has become a huge graveyard for countless foreign companies who thought they were going to get great exposure and penetration into this market," said Woodford, "only to find out after it is too late that their interests were not receiving nearly the attention they needed, particularly in the critical first three years in this market."

What companies do wrong
Companies fail when they assume a product that sells well in the States or in other countries will sell well in Japan. "Invariably the product needs to be adapted," said Anne Balfe, of Dublin-based Market Asia. "This may mean changing the functionality and look, and most definitely providing Japanese language instructions. Consumer software won't sell in Japan unless the user interface is in Japanese." A successful US candy company brought its product to Japan, trying for years to sell it in large bars. After further research, the company learned that Japanese consumers prefer bite-sized, individually wrapped pieces. After revising the packaging, the company had much better sales in Japan.

While companies should certainly be sure to take into account market sensitivities, said Markus Leach, president and CEO, JCI Consulting, "There are some dramatic examples of foreign companies who were able to stick to their guns and to force change in the market." JCI did recruiting for Dell Computer Corp. when they were starting out in Japan in the early 90s, and, said Leach, "It was a challenge to find good candidates, as many felt their direct sales model, as opposed to the traditional channel selling, would fail. However, Dell proved everyone wrong and forced their competitors to also adopt direct sales activities."

One can't count on that kind of success, though, or on getting a second chance. "Japanese business and consumers are harsh on companies that don't make it, and inevitably bad publicity spreads quickly through your industry like wildfire, more so than in Western countries," said Craig Evans, president, Axcel Consulting KK. "Rebuilding or starting over is difficult and an unpleasant activity which should be avoided. The flip side of the coin is that there are immense rewards and good profits to be made providing the business is developed correctly."

An international voice telecommunications company -- a big global name with a solid reputation -- came into Japan, "with all guns firing," says Steve Paulachak of Robert Walters Japan KK, "making all the right moves, setting up sales and engineering support teams, only to find their strategy was not working." "They then decided to go the distributor/partner route," offered Robert Walter Japan's Vikram Shahani, "and promptly laid off all their newly hired staff. Now that they have been here for a while, they want to re-staff and grow, but the early mistakes are haunting them, as they have a reputation of instability." This also affects the sales and business relations so important to any business. "Japan needs consistence of performance and direction," said Paulachak. "Firms that have passed this test in the crucial initial years now reap the benefits. Once the Japanese trust you, it's a long-term deal."

Companies can also fail if they have a lack of sustained capital. "It's very expensive to conduct business in Japan," said Cynthia Green, vice president, human resources, Panache. "Many companies may not realize the high cost of conducting business, and many times will heavily invest in image-building assets or promotions that do not reap immediate returns."

Localization involves research and changes to a product to make sure it's of interest and useable by the Japanese market. This includes double-byte enabling software products and making other product adaptations for Japanese preferences. Most consultants advise starting with internationalization, or taking steps to ensure that a product would work anywhere in the world, and then localization, or making changes to the product for a specific market. Internationalization could include enabling software to handle multiple currencies so it could work internationally.

Companies may also view Japan as too unique or difficult to understand. "To a certain extent the when in Rome' mentality should be taken in Japan, but don't forget that all countries are unique and special, with no one really more so than another," said Daniel Dippel, business development and marketing manager, Landscape. "This perception is more a creation of media and our exposure to it. If you really think about it, America and many other countries have much more diversity than Japan, which inherently would make them more difficult to understand because of the diverse market segmentations and sub-cultural groupings." Another common pitfall is to rush into a distributor agreement to race a product to Japan, only to find the agreement is difficult to end later. While distributors provide an easier and less expensive entry into Japan, companies that know they want to expand their reach in Japan later need to carefully review these agreements.

Though it can be difficult to end distributor agreements because of intellectual property and inventory issues, exiting a distributor relationship doesn't mean automatic failure for a foreign company. One medical supply company operated through a distributor in Japan for eight years and realized its distributor was only covering a small portion of the market. Ultimately, Moscato said, the company found it more advantageous to end its distributor relationship.

While Japan's challenges are not insurmountable, the companies that do best spend some time doing their homework, developing realistic expectations, and seeking appropriate counsel before they set out.

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