Myths of Japanese profits and market share

Myths of Japanese profits and market share

In the previous section introducing the myths of Japanese business and the Japanese market, we noted that the myths were originally used as excuses for poor performance: let’s look at some of the Japanese business myths related to profit and market expectations for foreign companies doing business in Japan.

  1. Myth: Japan is the last market any foreign company should enter; wait until there are millions of dollars of spare cash in the bank and then try.
    Fact: Foreign company executives who hear this myth, probably hear it from an acquaintance at a local business association or country club: the acquaintance probably heard it from his acquaintance and so on. The originator was probably an executive whose company used an inexperienced market-entry consultant to set up in Japan, or who didn’t seek any external advice, and failed. In my experience, companies, especially technology companies, should put Japan #1 on the list of international priorities. For a properly structured and efficiently run business, Japanese margins can far exceed those of other markets.
  2. Myth: Japanese corporate customers move very slowly, they don’t use quarterly business periods so forecasting quarterly revenue is meaningless and Japanese distributors just don’t do it.
    Fact: Foreign company executives who hear this myth, probably hear it from their under-performing Japanese subsidiary President or sales manager. If so, they hired the wrong people. Japanese corporate customers do tend to move slowly and do work on half-yearly budget cycles from April 1 – September 30 and October 1 – March 31, but a foreign company’s executives need reliable revenue forecasts and a quarter-to-quarter focus on their Japanese business, especially if the company is in the run-up to an IPO or already publicly listed.
    I managed the Japanese subsidiary of a US high-tech for the sixteen quarters before its IPO; my team provided the head-office executives with predictable revenue forecasts and delivered profits every quarter. In the words of that company’s Chairman, “We completed our IPO because of our Japanese revenues.” If my team could do it, then why can’t others?
  3. Myth: If a foreign company does not set up a KK kabushiki kaisha company, similar to a US C-corporation, its customers will not believe it is credible and its Japanese business will fail.
    Fact: A foreign company’s Japanese customers will be impressed it is making any form of long-term commitment to Japan, whether a KK kabushiki kaisha, GK godo kaisha, or otherwise.
    Exxon-Mobil operates in Japan as a GK godo kaisha, similar to a US LLC, so do Apple, Amazon Japan, and many others.
  4. Myth: No Japanese company makes profits in its first year of business.
    Fact: Again, foreign company executives who hear this myth, probably hear it from their under-performing Japanese subsidiary President or sales manager. Excepting companies that must build large manufacturing facilities or have other large upfront capital investments, any Japanese company with a good product or service, a committed, motivated, and hard-working team, and which is properly structured and funded, can make a profit in Japan in its first year of business.
  5. Myth: A foreign company must persist doing business in Japan for five years before it can make a profit.
    Fact: Again, foreign company executives who hear this myth, probably hear it from their under-performing Japanese subsidiary President or sales manager. Sounds like a nice relaxing first five years for one of them! As noted above, excepting companies that must make very large upfront capital investments, it does not take five years to make a first profit in Japan.
  6. Myth: A foreign company must spend at least $??millions each year in Japan for the first five years before it can make a profit.
    Fact: This is a variation on the previous myth, again often heard from an under-performing Japanese subsidiary President or sales manager. Not only do they want a five-year vacation, they want a king’s salary while they take it! Again, excepting companies that must make very large upfront capital investments, no company needs to spend $??millions to make its first profit in Japan.
  7. Myth: No matter how good a company’s product or service, no foreign company can exceed ??% market share in its sector in Japan.
    Fact: This is another myth that foreign company executives might hear from their under-performing Japanese subsidiary President or sales manager. The myth originated from the Japanese President of a US PC vendor in the early 2000s when trying to explain why the subsidiary was not performing as expected. That company not only withdrew from Japan but eventually ceased trading, meanwhile Dell proved that a foreign company can conquer the Japanese market. Many companies such as Microsoft, Cisco, IBM, Yahoo! Japan, Dassault Systemes. Chanel, Prada, Bulgari, Cartier, Tiffany & Co., Louis Vuitton, Gucci, BMW, Mercedes-Benz, Adobe, dominate their market sectors in Japan. In the late 1990s, I managed a very small US 3D software company’s Japanese subsidiary and we took on and beat a major Japanese company to the extent that it eventually withdrew its product from the market because it could not compete with us. This myth is false.
  8. Myth: It’s much more expensive to sell in Japan than elsewhere, so of course Japanese distributors and resellers demand 70% or more of a foreign company’s Japanese sales.
    Fact: Thirty years ago, it was much more expensive to sell in Japan than elsewhere. Nowadays, office rents in Japan remain high but employee pay, despite a shrinking bilingual workforce, has dropped as deflation persists. For reference, my experience is a US$300,000 a year office of three people, can earn around US$1,000,000 sales, depending of course on the value of the products and services sold. Those figures exclude the CoGS associated with buying and importing products from its foreign parent. Every foreign company doing business in Japan with distributors should calculate such a rule of thumb metric for its business and use it as the basis for negotiating transfer-pricing with its Japanese distributors.

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