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"Foreign Firms Think Their Way Into Japan"

This opinion piece appeared in the September 20, 1999 issue of Nikkei Weekly, Japan's English-language business newspaper.

        Some of the most successful foreign companies in Japan, like giants Coca-Cola, AFLAC and Hewlett-Packard, are those that have operated there for decades, establishing themselves as incumbents before frequently-discussed barriers to new entrants were fully erected. Japanese have come to think of these companies as their own.

        But when other foreign companies tried to follow these giants into Japan in the 80s and early 90s, they were burned by unrealistic expectations for quick success and profit.   Foreign manufacturers encountered wholesale channels that many experts agree still are effectively closed to both foreign and Japanese entrants.  Foreign service firms were stymied by a ‘no foreigners allowed’ fortress mentality.

        Up until very recently, pundits and the press have regularly reminded foreign companies that Japan’s economy is on the skids, its industry paralyzed, its government indecisive, consumers cutting back.  With plentiful growth opportunities elsewhere in the world, conventional wisdom held that foreign companies should bypass Japan.  Many did.   But now that many believe Japan's economy has stopped shrinking, is it time for another look?

        We think so.  Amidst a recession in Japan over the past two years, and negligible economic growth this decade, many foreign companies have still managed to contradict conventional wisdom and ignore the pundits.  Despite trade barriers, recession, continued onerous regulation and a banking crisis, many foreign companies have been pursuing winning strategies in Japan, often learning as they go.  Moreover, many are using new and/or sophisticated approaches along the way, some of which would have been impossible just two or three years ago.

Profitability within reach

        How do we know?  We recently surveyed 61 foreign companies in Japan (primarily from Europe and North America), with sales there ranging from $700,000 to $2.2 billion.   What respondents told us was that profits there are not elusive -- indeed, 77% achieved profitability within three years of market entry.  Respondents felt that being active in Japan also allowed them 'to adapt Japan business techniques for other markets’ and ‘has led to new product ideas and modifications for other markets.’  And 69% reported that the average unit price of their products or services to the eventual end-user Japanese customer (not to channels or middlemen) was higher than the prices they realize for the same goods in the US.

        Interestingly, nearly 70% of respondents felt that Japan was somewhat or significantly more difficult than other markets from which their company or division achieved significant sales.   But Japan's trade barriers and regulations were not among the most-cited reasons for the difficulty.

        The most commonly cited obstacle to success was ‘Difficulty meeting Japanese customer requirements,’ chosen as one of their three greatest obstacles by 29% of respondents.  As one respondent explained: “The issue is that Japanese customers’ expectations with regard to quality are (just) higher.”

        ‘Non-legal (soft) restrictions and cultural requirements’ was the second-most commonly cited obstacle, mentioned by 19% of respondents.  Two other obstacles tied for third-most frequently mentioned (16%): ‘Difficulty obtaining in-depth, reliable and objective market information,’ and ‘Mustering sufficient internal resources to manage the effort there.’  But ‘Legal regulations and restrictions, including tariffs and trade barriers’ was mentioned by only 10%.

        While our sample is small and doesn't reflect the views of companies which have withdrawn from Japan, many smart and fast-moving foreign companies have publicly announced strategies to take advantage of Japan’s recent economic woes.  Merrill Lynch and Cargill are two companies using Japan’s bankruptcy process to acquire major domestic players, and through them, a nationwide distribution system overnight.  Both previously experienced difficulty in expanding, and both understand that the promise to preserve employment in a bankrupt Japanese company can be as important as financial support in the restructuring process.

        Far more quietly, GE Capital continues to roll-up purchases of Japanese consumer finance and leasing companies.  Asset deflation has lowered the cost of acquisition for all of these companies.  Costco, Wal-Mart and Carrefour have all decided that Japan’s newly price-conscious consumers are ready for their discount store formats.

        Smaller, private companies have also demonstrated surprising smarts in their dealings with Japan. Like most international sales executives, the International Director at Progressive Electronics often visits customers when he travels abroad. The difference is, in Japan he visits them alone, without being accompanied by his company’s local distributor. He understands that his company’s customers there, small firms themselves, will often share more of their future product plans with him alone, an outsider, than if Progressive’s distributor, a potential domestic competitor, is present. International Enzymes, a maker of pharmaceutical raw ingredients, decided to link up with small, specialty distributors in its industry rather than go with one of the large Japanese trading firms JETRO often suggests. International Hobbycraft chose a distributor that knew how to lobby regulators to gain approval for its toy model rockets. Fran Wilson Cosmetics uses multiple, local distributors because no single firm can effectively sell its niche product lines nationally.

Direct dealing

        Hanna Engineered Materials in Atlanta, a subsidiary of MA Hanna, the NYSE-traded plastics and rubber manufacturer, announced last year a global 50-50 joint venture with UBE Industries to supply engineered materials to Japanese automakers and other Japanese manufacturers in the US, Europe and China.   Although there aren’t any formal plans for the Japanese market yet, the venture is an example of an increasing number of US companies that are learning how to service Japanese customers and partners without exporting or ever leaving home.

        Manufacturers like NYSE-traded engine parts maker Howmet and service companies like TBWA Worldwide, part of the Omnicom Group, have both become majority owners of Japanese companies in recent months. Johnson Controls has obtained management control of Tokyo Biso Kogyo, traded on the Second Section of the Tokyo Stock Exchange. For years, it was impossible for foreign firms like TBWA, Merrill Lynch and Cargill to have majority control of firms in Japan’s service industries. (TBWA bought majority control of Nippo Advertising, Japan’s 15th-largest ad agency).

        But opportunism and altruism sometimes coincide -- TBWA bought control from Nissan, one of its most important worldwide clients, when that company sought to divest non-core assets and few Japanese buyers had cash to offer. Howmet wanted control of its long-term manufacturing joint venture with Komatsu before introducing more of its proprietary technology and operating methods.

        Other companies have figured out ways to avoid overhead. Herbalife, the vitamin and health products company, contracts with Air Express International to break down its large shipments to Japan into customer orders, avoiding the hefty expense of having its own large distribution and fulfillment staff in Japan. Japanese customers, however, think they’re dealing directly with Herbalife, not AEI.

        Bypassing Japan’s distribution system completely, firms like Neiman Marcus, Land’s End, Cyberian Outpost and have established Japanese-language sites on the internet, localized and customized to give the Japanese consumer an enjoyable purchasing experience.

        Executives know better than pundits. With so much of the world in recession, but Japan poised to rebound, many are now giving Japan a second look. Look in the trenches, where foreign companies are entering and growing in Japan, using the same key success factors as elsewhere: a well-conceived strategy, hard work, and focus on the customer.

International savvy

        When the yen is strong, they know how to manage exports profitably. When it’s weak, they know that everything from Japanese office space to advertising to acquisitions is cheaper. M&A, the internet, link-ups with Japanese manufacturers operating abroad, these are just a few of the strategies that weren’t available or widely practiced in the past. Understanding, as Progressive does, the dynamics of relationships between far-away distributors and their far-away customers demonstrates more international savvy than many give small foreign companies credit for.

        Foreign company executives working with Japan don’t have the time or the interest to proclaim themselves winners. But if you ask them, they’ll tell you the truth - the only insurmountable market barrier to Japan these days is not being there.

    Jay Nelson is Senior Editor of Success Stories: Japan (, an executive newsletter in New York focused on identifying and sharing winning strategies foreign companies are using in Japan. He also speaks to executives about international business topics.

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