How to kickstart business in Japan? How to avoid well-known mistakes?
Breaking into Japan’s market: why does it make sense?
Quick answer:
Japan is the world’s third largest market, competitor, and partner. With 125 million people it’s a large and important country.
Japan is an innovation power house – many recent global technology revolutions started in Japan:
- The global mobile internet revolution started February 22, 1999 in Japan with Docomo’s i-Mode
- mobile payments and electronic money many years earlier than elsewhere
- the global solid state lighting revolution started in Japan with the invention of GaN LEDs by Shuji Nakamura, for which Shuji Nakamura, Hiroshi Amano, and Osamu Akasaki were awarded the 2014 Nobel Prize in Physics
Get a feeling for the size of Japan’s markets
- world’s third largest GDP, Japan represents about 10% of the world’s economy
- 25% of the world’s high-tech products are made in Japan, 30% of all cars are made by Japanese brands
- Japan’s top 8 electronics makers’ annual revenues are about as large as the economy of The Netherlands
- Japan’s smart phone games sector is the world’s largest in terms of cash revenues
You’ll find more in Gerhard Fasol’s talk at Stanford University.
Japan market entry: Win big – or lose big. Why can it be so difficult?
Japan was never a western colony
… and that is not a coincidence, but largely due to Japanese people’s strong will and traditional abilities. (Thailand is another Asian country which was never a western colony…)
Some – but by far not all – western companies find it difficult to succeed in Japan. Reasons include:
- Japanese customers can be very demanding, and often have quit different tastes and needs than Western customers. Therefore in many cases western companies must redesign or redevelop products in order to succeed with Japanese customers. Examples where this is the case range from baby napkins, to tooth brushes, cars and mobile phones.
- Because of Japan’s size, substantial investments are necessary, and therefore the inherent risks are also large: you either win big, or lose big
- Japan has many very strong local companies. As an example, eBay lost in Japan against local competition and withdrew from Japan. Japanese companies also will not usually welcome a new competitor, but develop strategies to compete hard against new entrants. You must be prepared for such competition with very thorough market research and strategy development. If you do not thoroughly understand your competition in Japan, you have little chance to win. In order to win in Japan you must understand and must be prepared and able and willing to compete with local competition
- Management methods and the actual managers at headquarters in US and EU have certainly won many achievements in the US and Europe and elsewhere. In many cases, however, Western managers and Western management teams are ill prepared to succeed in Japan. In many cases, drastic changes in thinking and management methods and personell changes at headquarters would be necessary to succeed in Japan. However, there are not many Western companies, which act on this knowledge
Many foreign companies, large and small, fail in Japan – don’t become a loser!
- Vodafone
- London Stock Exchange AIM Market
- Volkswagen investment and partnership with Suzuki Motors
- Nasdaq
- eBay
- Cable & Wireless
- Daimler with the Mitsubishi Motors acquisition
- Carrefour
- Boots, The Chemist
- 3i
Japan market entry: Changes and new opportunities
“Lost twenty years” followed by Prime Minister Koizumi’s reforms and then Abenomics
- After Japan’s “bubble economy” of the 1980’s burst, for about ten years a period of denial followed, where Japanese leaders hoped and waited that share prices and real estate prices would jump back to bubble-time levels and continue their bubble-style rise. This denial was a major factor for the “lost decade – or two decades” which encouraged Prime Minister Koizumi to reinforce reforms of Japan’s government, legal and economic structure. After the end of Prime Minister Koizumi’s government the pace of reforme slowed down considerably, however was not reversed as some voices demanded. These changes create new opportunities for many parties, including industrial companies and investment funds. There are several other factors which drive change, such as the globalization of the economy and the internet – which was not planned at all by the Japanese government, but imposed on Japan as a fait-accompli.
- With the need for change becoming more obvious we have now entered the phase of “Abenomics”.
Merger and Aquisition (M&A) opportunities
The volume of Mergers and Aquisitions is rising in Japan, and is larger than often assumed: the volume of M&A in Japan is on a similar level as for example in Germany.
The lions share of M&A is within Japan: Japanese companies acquiring or merging with other Japanese companies. One of the largest acquisitions of a Japanese corporation by a foreign corporation in the last years was Israel’s Iscar acquiring Japanese Tungaloy
The three largest acquisitions ever of Japanese companies by EU companies have been Vodafone’s acquisition of J-Phone (transaction value: about US$ 20 Billion in a series of acquisition transactions), Daimler’s acquisition of Mitsubishi Motors (transaction value: about US$ 2-3 Billion), and Renault’s investment in Nissan (initial transaction value: about US$ 3 Billion) – of these three, only the Renault investment in Nissan was successful, while both Vodafone’s acquisition of J-Phone failed, and Daimler’s acquisition of Mitsubishi Motors also failed. In both cases, Vodafone sold Japan-Telecom/J-Phone/Vodafone KK to SoftBank and withdrew completely from Japan (except for a very small liaison office), while Daimler sold its stake in Mitsubishi Motors, but unlike Vodafone continues substantial business in Japan in other fields.
Japan market entry: Avoid well-known mistakes – don’t become a loser!
There is a large range of well-known mistakes foreign companies have been making over and over again in Japan for many years.
Surprisingly foreign companies continue to make these well-known mistakes!
Don’t make such well-known mistakes! (We can help you avoid them….)
Much of it is common sense. However, you also need to study a lot of facts about Japan, and customs. You will find that some assumptions you made are wrong! You’ll also find (surprise, surprise…) that not everybody (Japanese and foreigners) tells you everything they know.
Most “well-known mistakes” lie within the organization of your own company!
Sometimes problems in a Japanese subsidiary are best solved by changing responsibilities in the main office at home! We would be delighted to discuss such issues with you and work on a solution using our large range of experience.
A big “No-No”:
The biggest “no-no” is not to do proper preparation, or to start without a strategy. You can assume that normally your Japanese partners will do their preparations and they will have a big advantage, if you are unprepared. You will be surprised how many time consuming and expensive mistakes (in a well-known and extreme case this has cost approx. US$ 10 Billion…) are just due to lack of preparation, lack of information, and lack of planning. You will also need to learn a lot of basic facts. (It can save a lot of time and money to use an experienced consulting company)
Japan market entry: Why can doing business in Japan be so difficult – and what can we do about it?
You may often hear that doing business in Japan is very difficult – but you may have experienced that everybody was incredibly friendly when you visited Japan… So what’s going on? Here are a few facts:
- There is no other advanced industrial country with so little foreign investment. This is because for a long time foreign investors have been kept out. This policy has recently changed, and foreign investment is increasing rapidly
- Very few Japanese people (less than 3% – 5%) speak good English and as a consequence there has been a certain amount of intellectual isolation from the rest of the world
- Traditionally financial conglomerates (historically: Zaibatsu, now: Keiretsu) dominated the traditional large industry. It was difficult to do any commerce across the boundaries of these Keiretsu, and these barriers were even stronger against foreign companies. However, the old Zaibatsu/Keiretsu structure is now gradually breaking down
- It’s a very bureaucratic country in many ways, with a dense network of regulations, permissions, certifications, procedures, offices and authorities with approval procedures for many things, which don’t need approval in UK or US. Many of these restrictions are designed as entry barriers against newcomers to existing industries. Slowly these regulations are “eased” and seldom eliminated. With professional help, for example by lawyers or experienced management consultants – depending on what needs to be done – you can often find ways to do work – particularly in new industries. Note however, that there are also industries, where Japan is more open than the US and Europe to outside investment. An example is Japan’s telecommunication industry: Vodafone had no difficulty at all to acquire almost 100% of Japan’s No. 3 telecom operator. That Vodafone failed had nothing to do with the closed nature of Japan or any Government intervention
- Vodafone’s failure in Japan was largely due to two factors: (a) Vodafone did not invest enough into the network infrastructure, and (b) Vodafone did not offer the mobile phone handsets which Japanese consumers prefered, so they defected to competing operators. In fact, after acquiring Vodafone-Japan, SoftBank succeeded to turn around the company within about 6 months by giving customers the handset and the tariffs they wanted, and by investing at the levels required in Japan for network coverage etc
- However, internet, e-commerce, and the present “opening” may bring many changes, and evaporate some of the traditional difficulties…
Japan market entry: business relationships
Relationships are important in every country, and even more so in a “high context” country as Japan. You need to build relationships, take care of your relationships, understand why and with whom you build relationships, and avoid certain kind of relationships. You also need to understand the network of relationships which your partners and competitors work under. Here are a few facts:
- You need to carefully plan your relationships in Japan, and you need to understand your relationships. You need to be aware, that relationships in Japan are seldom defined by legal contracts alone, you need to work on your relationships and take care of them
- You need to be aware that, as anywhere else, your business partners in Japan will not tell you everything they know and everything they think and feel and plan for the future. In that regard Japan is really not that different from other countries. However, in your own country it will be easier for you to make guesses about what your partner could think and fell, while in Japan this might be more difficult for you. There are many examples, als in this day and age, where Western top management returns from negotiations with Japanese partners, celebrating success, while two days later a relationship breaks up. There are many cases where the Western side view and the Japanese side view of one and the same partnership are dramatically different, and one or both sides do not even know about this difference. Be warned, and do your homework
Traditional big industry in Japan tends to be organized and structured in historically grown industry groups. These used to be called “Zaibatsu” (= financial groups), and today these groups are usually called “Keiretsu” (= industrial groups). Until recently there were six such large groups, each grouped around a large bank and a large trading company at the center with a large number of companies in many different areas ranging from transportation, ship building, cars and electricals to insurances and department stores and beer factories. Recent bank mergers and other economic difficulties mean that the importance of these Keiretsu has somewhat decreased, but Keiretsu relationships are still enormously important in Japanese business and economy. For many foreign companies it is essential to understand the Keiretsu structure and to plan your business taking account of this knowledge. The figure below shows an up-to-date mapping of todays Keiretsu structure taking account of recent Bank mergers, including the announced Mitsubishi-Tokyo-Bank and UFJ merger. You will find a more detailed discussion and a large scale image (for printing) of our Keiretsu map here: “Best practice for foreign technology business in Japan”
Traditionally companies will only do business within the same keiretsu. For example, a keiretsu member will only buy beer from the beer company within the same beer company within the keiretsu, even if that beer is much more expensive than non-keiretsu beer. Of course such traditional business practices are opposite to procurement by competitive bidding. In today’s Japan you will find both competitive bidding, and other cases where traditional relations take priority over achieving the best price.
Japan market entry: Japanese Business Etiquette
There are many books claiming to prepare you for Japanese etiquette. Don’t believe everything these books say, and don’t make the mistake that you believe you are well prepared to do business in Japan after reading a book about “Japanese etiquette”! Still, here are a few essential tips:
There are many books claiming to prepare you for Japanese business etiquette. Don’t believe everything these books say, and don’t make the mistake that you believe you are well prepared to do business in Japan after reading a book about “Japanese business etiquette”! Still, here are a few essential tips:
- Business cards: Take enough (“enough” often means a couple of hundred) professionally prepared “meishi” (“meishi” = business cards). For Japanese people (as else where in Asia-Pacific) exchanging “meishi” is like shaking hands. It is very awkward not to exchange “meishi” when you first meet – few Japanese people will think this is funny. So make sure you have enough. Not to have “meishi” has the meaning of being unemployed (actually this is not specific to Japan alone, but Meishi are equally important in most East-Asian countries).
- Documentation: Impress with facts and achievements, or the fame and power and size of your corporation. Bring documentation of your company in Japanese language.
- Preparations: Be on time and well prepared for meetings. Use Japan’s train systems and subways, and make sure you check out the time tables online. Unless there are earthquakes, typhoons, or suicides on the track, Japan’s trains have typically much better time keeping performance than anywhere else in the world.
- Your company website: In case of doubt, its better to assume that your Japanese partner will have done very thorough research about your company. Assume that your Japanese partners/hosts will read and maybe even print out your company website. Cudos to you if you have a great Japanese language website.
- Do your homework: it is impolite not to do your homework (= market research) about the companies and people you are meeting. Your position will be weak if you have not done your preparations. There are many famous cases of foreign companies which lost billions of dollars and failed in Japan ultimately because they did not do sufficient market research and preparations. Read hear about some examples.
Penny-pinching on market research and preparations will haunt you.
- Seating: There is a sophisticated protocol how seating is arranged at meetings, at dinners or in cars etc. The seating protocol depends on seniority, guest-host relationship, the position of the door, decorations in the room, etc. If you are arranging important meetings or dinners at high level, it will impress if you follow these seating customs. Most foreigners who have not worked a long time in Japan will need advice from Japanese professionals to select the correct seating order. At dinners there are also customs about filling glasses etc.
When you visit a company you will be guided into the honored guest position in a Board Room at the top floor of the building – or into a small vendors meeting room outside the security entrance of the building – depending on status and the purpose of your visit and your rank.
- Little daily rules: There are a number of unwritten rules in daily life in Japan, which everybody observes, but nobody talks about, and which don’t exist in Europe or USA. For example: no eating and drinking and no baby’s perambulators (except folded up) on short-distance commuter trains. It’s your choice in a way, but you’ll make more friends if you observe these little rules. There are some things you should definitely not do:
- Don’t blow you nose in front of other people!
- Don’t kiss anybody as a greeting! (You’ll thoroughly embarrass your “victim”!)
- Never throw objects at somebody asking them to catch! Books, papers, documents, meishi, presents, and other important objects are given with both hands and a bow of the head.
- There are a couple of other “no-no’s” (gestures, comments etc) which will provoke embarrassment, or even hostility in Japanese people, and you might be unaware of them. You better ask for them and avoid them.
- Be prepared for surprises! Everything is changing rapidly recently!
Relax!
Don’t overestimate etiquette! Although your Japanese business partners may look dead serious (and Japanese people usually take work dead-serious…), they also are human and know to laugh… Here is a famous story (not sure it’s a true story though…) demonstrating what can happen with exaggerated cultural adaptation:
An important US-Japan negotiation is scheduled in Hawaii – midway between the american continent and Japan. The Japanese party and the US negotiation party both have done their preparations well: they studied the material, the facts, prepared strategies, fall-back positions, read up on how to negotiate with the Japanese (or the Americans) and read about cultural differences, and learnt a few polite word’s in the other party’s language. The doors open and in come the Japanese and the US negotiators. The Japanese negotiators – all experienced senior managers – trying their best to adapt to American culture and to create a good atmosphere, enter the conference room dressed in Aloha shirts, sandals, shorts while on the other side of the room the American delegation enters: dressed in stiff white starched shirts, dark tie, dark blue business suits, polished black shoes…
We’ll guide you:
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