Starting a Japanese sales office
Many companies start business in Japan with a distributor simply because they do not understand the costs of establishing a Japanese subsidiary. In fact by using good local hires and carefully optimized performance-linked compensation packages, 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. If your hires come through a head hunter then you will pay an additional $50k – $90k in first year for recruiting fees. That first year cost is similar to the percentage you might anyway pay to a Japanese distributor on $1million of sales in the software industry.
Of course a distributor takes the same percentage cut from all revenue it generates whereas a properly cost-controlled Japanese subsidiary can typically achieve the same incremental revenues at relatively low additional cost. 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 cost steps at certain points, for example when an office is outgrown and larger premises need to be rented.
In the physical goods markets, incremental cost per unit sold is a 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.
In many industries, starting business in Japan by direct sales through your own Japanese office or company is a 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 13 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 clear market leader status was won 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.