Entering the Japanese market

Back to Contents of Issue: January 2005

Entering the Japanese market

by Daniel Isenberg

The economic shift to Asia......................
One of the dramatic changes in the global venture community in the past five years has been a shift in the economic “center of gravity” from the US and Europe towards Asia. This is a process that will take many more years, but it is inevitable and inexorable. A generation from now India, China, Japan and Korea will be the world’s major consumers of technology and, to a large extent, its major producers as well. The shape of this new regional economy is forming rapidly Japan, China, India, and Korea have a total population exceeding 2.4 billion people, a combined GDP exceeding $13 trillion (the US figure is $10.5 trillion) and growth rates ranging from 3 to 9 percent.

Although now increasingly recognized by VC fund managers, this economic sea change initially caught the predominantly Western VC community unprepared, since US (and, to a lesser extent, Israeli) VCs have been traditionally oriented toward US institutions for fund raising, US financial markets and acquirers for fund liquidation, and US customers and revenues for value creation.

The Japanese economy...........................
Whereas the Chinese and Indian economies are rapidly emerging, exhibiting dizzying growth rates in the 4-9 percent range, the Japanese market is well-established, with a long legacy of development and acquisition of technologies and products, and (now that the 12-year recession is officially ending) slow to moderate growth. And even while emerging from its long, painful recession, the Japanese economy is much larger than China’s (in real terms), with modern and relatively transparent legal systems, patent laws, financial markets, governance systems, and a highly ethical and predictable business code. China, on the other hand, has a long way to go in modernizing its financial and legal systems, which are riddled with problems such as non-performing loans and non-economic criteria for credit issuing.

Japan’s advantages.....................................................................
In the context of the above macro factors, Japan has numerous advantages for venture-backed, early stage high-technology companies:
•A plethora of sophisticated customers with a hefty and consistent appetite for the latest technology
•A very advanced technology development capacity enabling its corporations to serve as development partners
•Laws to protect IP and a legacy of IP enforcement
•Segmental technology leadership (WLAN, mobile data services, broadband, consumer electronics, some medical devices, storage, displays — and increasingly biotechnology and drug discovery)
•Low cost of doing business (despite impressions to the contrary) due to high concentration of businesses in the greater Tokyo area (although human resources are expensive, roughly on a par with the US)
•A large pool of capable, highly educated human resources with a very strong work ethic
•Increasingly, a gateway to China, as Japan’s exports to China grow rapidly.

Japan’s disadvantages................................................................
Japan’s many advantages should not cloud objective consideration of the shortcomings. Its disadvantages include:
•A high degree of thoroughness in evaluating new products and technologies, which leads to long assessment periods and slow decision-making
•A strong customer service ethic, which creates demands on venture firms to provide the same level of service as their larger, domestic counterparts, including customized solutions with little or no customer participation in the necessary investment.
•An aversion to certain forms of risk taking, which impedes the uptake of really new and emergent technologies, particularly as they are deployed in service industries.
•High expectations regarding documentation — quantity, quality and consistency between documentation (e.g. spec sheets) and reality (actual product features and performance)
•“Followership” in certain key segments, such as networking and data security
•Language and cultural barriers that decrease transparency for the novice

Insight into the advantages and disadvantages of doing business in Japan can help the entrepreneur or manager of high growth ventures mitigate the risk of doing business in Japan and tap into tremendous opportunities.

This article first appeared in the Israel Venture Capital Journal (IVCJ), a quarterly review of trends in the Israeli related venture capital industry, published by IVC Research Center. For more information visit www.ivc-online.com/

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