In the previous section on considering a Japanese sales office for starting business in Japan, we noted some of the possible downsides of dealing with Japanese trading companies or distributors. Many foreign companies feel forced to start Japanese business with a Japanese trading company, reseller or distributor because of concerns about the costs of starting a Japanese company or office and recruiting Japanese staff. Based on more than two decades doing business in Japan, I am confident that if you recruit good Japanese staff with carefully optimized performance-based compensation packages, you can run an effective and aggressive 4 – 5 person Japanese sales office in central Tokyo for an inclusive base cost less than US$500,000 per year. I base that estimate on the software industry; in other industries the cost might be substantially less. If you recruit your first Japanese staff using recruitment agencies, then you will need to budget an added $80k – $120k 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 reseller on $1,000,000 of sales in the software industry.
The big difference is that while a Japanese distributor will take the same percentage cut from all subsequent sales it generates, the percentage costs of properly controlled growth for your company’s Japanese sales office or company to reach the same future revenues, are not as high. Depending on a software product’s price-per-seat and quality, a 4 – 5 person team selling enterprise software to Japanese companies should generate $3,000,000 or so of annual direct sales revenue, maybe a lot more, and each extra $1,000,000 over that base level can probably be generated for an extra $200k in annual cost (depending on the ratio of technical support to sales people and the required skill level). Of course there will be incremental cost jumps at certain points, such as when the Japanese team outgrows its office and needs to lease a larger space.
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 break point might be lower than expected.
In many industries, starting business in Japan by direct sales with your own Japanese sales office or company is a very real proposition. Critics will say its ‘too difficult’ because the ‘market is closed’, or ‘you can’t compete against the domestic Japanese companies’. Well, I have done direct sales in Japan for more than two decades for various foreign companies, during which time I have beaten off some severe competition from some very major Japanese companies. In one instance, my team even achieved 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 had some very respectable Japanese academics representing it 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 managed as subsidiary President, would never have achieved its IPO without its very successful Japanese sales team. 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 successful IPO!
A direct sales office in Japan 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 and CRM 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 Japanese sales team that will make doing business in Japan a success for your company. All too often a distributor produces excuses, but your Japanese sales office produces results.