Doing business in Japan information
by Venture Japan
In the previous section on considering direct sales for starting business in Japan, I noted the possible downside of dealing with Japanese distributors. Many companies start Japanese business with a distributor because they are concerned about the costs of establishing a Japanese subsidiary. Based on 16 years experience of doing business in Japan, and by using good local hires and carefully optimized performance-linked compensation packages, I am confident you can operate an effective and aggressive 4 - 5 person Japanese office in central Tokyo for an inclusive base cost less than $400k per year. That estimate is based on the high-tech industry and in other industries the cost may be substantially less. Unfortunately if your hires come through recruitment agencies then an additional $80k - $120k will need to be budgeted in the first year for recruiting fees. Such first year costs are not so different to the percentage you might anyway pay to a Japanese distributor on $1million of sales in the software industry.
The big difference is that while a distributor will take the same percentage cut from all subsequent revenue it generates, the percentage costs of properly controlled growth for your own Japanese office or company to achieve the same future revenues will not be nearly so great. Depending on a software product's price-per-seat and quality, a 4 - 5 person team selling enterprise software to Japanese companies should be able to generate $3m or so of annual direct sales revenue, maybe a lot more, and each additional $1m over that base level can probably be generated for an additional $200k in annual cost (depending on the ratio of technical support to sales people and the required skill level). Obviously there will be incremental cost jumps at certain points, for example when an office is outgrown and larger premises need to be rented.
In the physical goods markets, where the incremental cost per unit sold is the major consideration, especially if you are in the consumer market and need retail space, the revenue point at which the cost of direct sales through your own Japanese office and the cost of a distributor's cut occur will be much higher. Still, if most of your sales are to corporate buyers and you do not need expensive retail showroom space, that revenue breakpoint may not be so high as you think.
So, in many industries doing business in Japan by direct sales through your own Japanese office or company is a very real proposition. Critics will say its 'too difficult' because the 'market is closed' and you 'cannot compete against the domestic Japanese companies'. Well, I have been doing direct sales in Japan for 16 years for various foreign companies during which time I and my team have beaten off some substantial competition from some very major Japanese companies. In one instance we won clear market leader status for a US company's software product despite fierce competition from a Japanese household name company (Ricoh) that not only had first-mover advantage but was fronted by some very respectable Japanese academics in a very technical marketplace.
Other critics will say it costs too much; its too risky; you need to have deep pockets: leave it until after the IPO or go to Europe or North America first. Once again its just not so - one US software company I dealt with (as subsidiary President) would never have achieved its IPO without its very successful Japanese direct sales. At several times the high positive cash flows generated by its Japanese sales saved that company (which also had much bigger sales forces in the US and Europe) from failing. In fact it was eventually a 'last minute last day of the quarter' deal with a Japanese company that assured its successfully IPO!
Direct sales puts a foreign company directly in control of its Japanese destiny. You get the same degree of accountability, control, response, commitment and aggression that you would expect from your home sales force. You get 24/7 access to data and systems that are totally integrated into your home office IT infrastructure. You know exactly who is responsible for ensuring customer satisfaction, who is ensuring your corporate brand identity is properly reflected in your business activities and of course who is responsible for making those all important quarterly revenue quotas. If you are fortunate to build the right team of people you will have a group who will make doing business in Japan a success for you come hell or high water. All too often a distributor produces excuses - your Japanese direct sales office produces results.
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