TT-678 -- Ideas on Structuring a Japan Subsidiary, ebiz news from Japan

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, September 16, 2012, Issue No. 678


- What's New -- Ideas on Structuring a Japan Subsidiary
- News -- Scientists create flexible apatite
- Upcoming Events
- Corrections/Feedback -- Comments on ING pull-out
- Travel Picks -- Himeji Castle & Manazaru, Kanagawa
- Japan Business Q&A -- Foreign insurance and tax claims
- News Credits

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With one of our sister companies in the market entry
business, we have noticed in the last 3 months a gradual
increase in the number of foreign firms investigating
setting up an operation in Japan. It seems that the
realization that Japan has not melted down after
Fukushima and that the strong yen is here to stay, are
making for a compelling argument in foreign firms'
international expansion plans.

The increase in market entry activity is primarily in the
technology sector. Particularly noticeable are software
companies which serve specific niches such as academia,
health, ecology, finance, and compliance, and where the
main focus is a secondary organizational activity such as
risk management or quality assessment, rather than primary
activities such as Production, Sales, or HR/Accounting. We
take this to mean two things: that Japanese companies are
finding they have to refine their operations as they go
international, so as to compete, and, secondly, they are
indeed prepared to pay to become more sophisticated.

We thought it would be good to review how these firms
approach the market entry challenge, and in particular ways
to make setting up in Japan a little cheaper and less
risky. As it is, there is a tried and true pattern to
getting started here, which is:

1. Establish through trade shows, research, or existing
orders (from Japanese early adopter clients buying product
internationally over the Web) the level of interest in your
products/services. Trade shows are particularly good for
meeting all the major players in one convenient place, and
we recommend them. Just remember, don't stay cloistered in
your booth, get out there and meet as many other exhibitors
as possible. Some of them may become distributor candidates
and others a potential source of future employees.

Then there is market research, which is notable in how it
is changing as a discipline. In earlier times, the
deliverable was a nicely presented document about the
market and the players, and was intended as a base planning
tool on which all subsequent market development activities
would be built. However, in recent times, companies are
starting to look for live sales leads even as they do their
research -- as a means of paying for the actual market
entry. Look for research companies that offer this option,
and you'll find that a real sales discussion will help you
identify (and resolve) many more issues than would
otherwise be evident in a report alone.

2. As your sales leads progress, at some point the
Japanese side will ask you to set up a local office in
Japan. While your management may not understand why
having a Japan office is important in the early stages of
market penetration, since for them it just serves to push
costs up, nonetheless, keep them focused on the "Japan
Premium" to get them committed. On the Japanese clients'
side, what they are looking for is to get you to have real
people on the ground, speaking Japanese, and with the
ability to get quick action from the Headquarters team when
things go wrong. In our view, this expectation is quite
sensible, even if it makes your products more expensive.
What's the point of spending hundreds of thousands of
dollars on a piece of technology if there is no one to
support it when a bug or integration problem is found?

[Continued below...]

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Communications is looking for someone to fill a senior
editorial position.

The successful candidate needs to have strong writing
experience, proven people skills, and the ability to work
on both paper and online to reach our audiences. English
native ability is essential, Japanese spoken (JLPT2 or
better) would be an advantage.

Salary is modest, but the working conditions are good. Visa
sponsorship is possible, but we prefer candidates to
already by in Japan.

Contact the publisher for more information and an

[...Article continues]

3. Having made the decision to establish a Japan office,
the next question is how to do it without too much cost or
risk? The usual and easiest way is to abdicate
responsibility by appointing a Master Distributor to take
on all sales, service, and support responsibilities. While
this sounds ideal, the downside is that the same
distributor also gets to keep most of the market lessons,
client database, and revenue as well. As a result, several
years go by, and you start to realize that things aren't
going according to expectations and that the distributor
doesn't want to listen to suggestions on how to improve
things. Worse, their best staff have probably moved on, and
the remaining ones seem incapable of moving quickly and
developing new customers outside their comfort zone. Yup,
conditions are ripe for a divorce and for the foreign firm
to go it alone.

However, separating from one's distributor is not easy and
is fraught with legal and competitive considerations which
are ultimately damaging to sales. The classic fight in 1991
between Borden Foods of Columbus, Ohio, and Meiji Milk,
over the Lady Borden brand is a good case study. After
Borden felt they could do it better and divorced Meiji, not
only did the company go under several years later (due to
issues back in the USA), but Meiji came out with a
successful competing product and all its distribution
channels intact. The Lady Borden icrecream name still
survives under Lotte product management, after a brand
asset sale in 1994, but it now has a much smaller market
share than it used to.

So we have two pieces of advice to new-to-market companies
trying to balance the need to keep costs down, with the
likelihood of a messy partner divorce if they are
ultimately successful in Japan (and why else would you
enter the market if you didn't think you would be

Firstly, retain certain controls of your Japan business,
particularly your ownership over the customers and IP, when
negotiating the initial deal with your distributor. They
won't like it, but stick to your guns and you'll be
thankful later. Practically speaking the functions you need
to retain for in-house staff are marketing and support.
Importantly, these functions should be separate to and
located outside of the distributor's operation. Don't be
tempted to put the staff into your distributor's office.

Why? Because if you allow the staff you've hired for these
functions to work deeply inside your distributor's company,
they will quickly be re-programmed by the distributor's
staff -- it's the Japanese way, group-think and all that.
As a result, you'll notice that messages get filtered,
processes take longer, and distributor opinions will become
fact. Therefore, Rule No. 1 is to keep the marketing and
support separate and under your control.

Our second piece of advice is how to establish this
independence cheaply. Typically, establishing and
maintaining a company in Japan is expensive -- a good CEO
will set you back at least JPY15MM a year, and they will
want a Sales Manager, a Tech/Support Manager, an office
manager, and several junior staff. Add these people all up
and you're looking at JPY30MM-JPY40MM in annual salaries
alone. There is also the fact that in hiring a CEO you have
previously never worked with before, you have the
not-insignificant risk of that person not working out.
There is nothing quite as expensive and hair-raising as
having to deal with a spurned CEO who still holds the
company seal and the authority to bind the company to

There are several alternatives to setting up your own
directly owned and operated firm, and yet still retain
control and keep costs down.

1. The first option is to set up a representative office.
This is where you have a team working in Japan but in fact
there is no legal structure and they work directly for and
under the control of your head office. This of course
means that you have to find a business development manager
who is emotionally strong enough to work independently and
without the usual "support" structures that most Japanese
look for in an office environment. Such a person is hard to
find, and often they will be a business consultant who has
fallen on hard times. As independent consultants, they can
be quite idiosyncratic and may not be good team players --
but certainly they will be cheaper than a full "normal"
team line-up and often much more creative. Just be sure
that they are properly and intensively connected to the
head office, so as to extract knowledge and give them
decision-making input.

Several other downsides of a rep office is that they cannot
receive revenues from Japan sales, but this can be finessed
by having customers sign contracts for overseas delivery.
Also, in truth, a rep office is NOT a registered business
in Japan and therefore doesn't really meet the requirements
of those customers who might be looking for a full-fledged
commitment. This is something you need to negotiate with
your customers before heading down this path.

2. A second way to crack this nut is to set up a company,
but only use it for accounting purposes. Instead, you can
outsource the work roles to a licenced outsourcing firm with
suitable resources and have that company provide all the
operations infrastructure and management oversight. This
avoids having to manage the staff from an administration
point of view, and adds the advantage that the staff are
working for someone senior who is also local. This is
important because it means that you can recruit people
further down the food chain but get similar results. For
example, instead of hiring a consultant/CEO-level business
development person, you can instead focus on hiring a
high-productivity sales person, and likewise, for the
technical/support staff, look for more junior staff who
will probably have better language skills and be more
malleable in the training process.

Let's end here, but with a note that we will cover more
rationales behind setting up in Japan in future Takes.

...The information janitors/


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+++ NEWS

- Scientists create flexible apatite
- Anti-Japanese protests accelerate in China
- 20% fall in Chinese tourists predicted
- A LOT more centenarians
- OKI accounting scandal hits their books

=> Scientists create flexible apatite

In a major breakthrough, researchers at Kinki University
have created an all-apatite sheet which can be applied to
individual teeth to protect them against decay. The new
technology will allow dentists to apply new layers of
tooth enamel on teeth that are starting to decay, and
restore the teeth to their original condition. The film can
also be colored, so that yellowed teeth can be covered with
white enamel and look attractive again. The sheet is formed
by firing lasers at blocks of hydroxyapatite and causing
individual particles to fall out and build up on a salt
substrate. They are then heated to crystallize, the salt is
removed, and the resulting film put on to a paper backing,
ready for application. Scientists say it will be about 3
years before the technology is available for cosmetic
surgery and 5 years before it is used for prevention of
tooth decay. ***Ed: Amazing stuff -- this will be one very
valuable patent for the researchers involved.** (Source: TT
commentary from, Sep 16, 2012)

=> Anti-Japanese protests accelerate in China

Friction over the Senkaku islands, coupled with the chest
beating that typically accompanies the 5-year hand-over of
leadership in the Chinese communist party, have made for a
potent mix this week. On Saturday and Sunday, rioters in a
number of cities have been attacking drivers of Japanese
cars, looting Japanese stores and restaurants, and
attacking Japanese factories. Protestors have also been
pelting the Japanese embassy in Beijing with eggs and
rocks. ***Ed: In other reports, Japanese newspapers are
saying that up to JPY2bn of goods have been looted so far.
Perhaps one more reason for Japanese retailers to start
thinking about "localizing" their brands and factories to
diversify away from China.** (Source: TT commentary from, Sep 15, 2012)

=> 20% fall in Chinese tourists predicted

The Senkaku Islands spat highlights the capriciousness of
the tantalizing Chinese market for Japanese firms. This
includes tourism. The Japanese National Tourism Office
(JNTO) reckons that visit numbers may fall by as much as
20% for the year if the protests continue -- severely
affecting those areas that have been popular destinations
until now. After a previous incident involving the arrest
of a Chinese skipper in 2010, tourist numbers fell by 16%.
China Comfort, a collective of 5,000 travel agents inside
China has cancelled all Japan tours and is refunding its
customers and other agents report up to a 40% drop in
bookings. (Source: TT commentary from,
Sep 13, 2012)

=> A LOT more centenarians

The Health Ministry has announced that a record 51,376
people are aged 100 years or older this Respect for the
Aged Day (Monday, Sep 17, 2012). This is up 3,620 people
from the same time last year. The number of centenarians
is increasing rapidly, starting at 153 in 1963 when
government records first began, to 10,000 people in 1998,
30,000 in 2007, 40,000 in 2009, and 51,000 today. The
oldest person in Japan is Jiroemon Kimura, who is 115 and
is in fact the oldest male in the world. (Source: TT
commentary from, Sep 14, 2012)

=> OKI accounting scandal hits their books

The full impact of Oki Group's Spanish office accounting
fraud is starting to make itself felt, with the company
finally announcing revised results for its international
business. The fraud has cost Oki at least JPY8bn, and
probably more by the time it is completely disentangled.
The group's shares have fallen about 20% since the original
announcement in August, although this is better than the
few days immediately after, when shares initially plunged
40%. (Source: TT commentary from Oki press releases, Sep
15, 2012)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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---------------- Start a Company in Japan -----------------

Entrepreneur's Handbook Seminar 29th of September, 2012

If you have been considering setting up your own company,
find out what it takes to make it successful. Terrie Lloyd,
founder of over 17 start-up companies in Japan, will be
giving an English-language seminar and Q&A on starting up
a company in Japan.

This is an ideal opportunity to find out what is involved,
and to ask specific questions that are not normally
answered in business books. All materials are in English
and are Japan-focused.

For more details:



In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to

=> In relationship to a news mention In TT677, concerning
ING exiting Japan's insurance business, a reader shares
some background with us.

*** Reader Comment:

Your note about ING is quite interesting. I cannot tell
you how many times guys in the Variable Annuity business
used to say that the insurance wrapper on the annuities
policies cost them virtually nothing. When they were
calculating the cost over a 7 year period, there was
almost no time in history where the stock market had not
corrected to a higher period. So the term "event risk"
ended up not being a problem in pricing at all. Normal
risk at the time took into account 250 days of historical
trading vols only. 7 years of a down market in stocks was
well beyond the risk parameter defined at the time,
despite the fact that risk managers were aware of it. When
management was quizzed about the business, the response was
that it was the way they did business, and not a reason for
concern. It had never caused them a problem to date...



=> Himeji Castle, Hyogo
The best of the "top three" castles in Japan

If you only see one castle in Kansai, put this at the top
of your list! Reportedly the most visited castle in Japan,
Himeji Castle (Himeji-jo), nicknamed the “White Heron” has
been standing proudly on top of a hill called Himeyama for
400 years. Constructed from wood, not stone, it is named
the White Heron due to its white plastered earthen walls
that help to make it fireproof. Built by Regent Toyotomi
Hideyoshi in the late 16th century, the first castle was
destroyed by Ikeda Terumasu, a feudal lord under the
Tokugawa Shogunate in 1600, who built this new fortress
over eight years.

=> Manazuru's Mitsu-ishi (Three Rocks), Kanagawa
Enjoy a stroll along this rocky cape

If you have ever visited a Japanese temple or shrine, you
may have noticed impressive trees or rocks decorated with
sacred rope. These trees or rocks are considered to be gods
in Japan, and the sacred rope shows that they are special.
Mitsu-ishi, (the Three Rocks) located at Cape Manazuru, is
like this. Three large, sacred rocks sit in the sea, very
close to shore.

Manazuru, the town, is nestled in a small, beautifully
wooded peninsula that sits just southeast of Hakone, only
1.5 hours train ride from Tokyo Station on the JR Tokaido
Line, and 15 minutes from Odawara Station. The name
“Manazuru” originates from the shape of the peninsula,
which resembles a crane with its wings open. The cape is
the neck and head of the crane and is partially composed of
lava from Hakone’s ancient volcanoes.


+++ JAPAN BUSINESS Q&A -- Foriegn Insurance and Tax Claims

=> Question

Are expenses paid for an international insurance plan
deductible from my Japan income taxes? Are expenses paid
for medical procedures performed overseas similarly

*** Answer

1. International insurance plans

Premiums on life insurance contracts concluded in Japan
may be deducted if the taxpayer, the taxpayer’s spouse, or
another family member is the beneficiary. However,
contracts concluded in a foreign country with a foreign
insurer are not eligible for deduction. Therefore premiums
paid on international insurance plans are not deductible
from your Japan income taxes.

2. Medical procedures performed overseas

Medical or dental expenses at home and abroad incurred
directly by a taxpayer or by the spouse or other family
members that reside with the taxpayer and which exceed
insurance reimbursements are deductible to the extent they
exceed the lesser of JPY100,000 or 5% of your total income,
limited to a maximum deduction of JPY2 million.

To continue reading



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