Doing business in Japan and entering the Japanese market with Japanese distributors

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1. Making your Japanese distributor work.

In late March (2004) a national Japanese TV evening news business report covered US TFT TV vendors who are flocking to sell their TVs in Japan - the average Tokyo discounted price is 2x the US price US consumers will pay! The moral of that Japanese business news report is that even in 2004 the value of your product in Japan may be substantially higher than in other markets you deal in.

In 13 years of doing business in Japan, I have noticed a common problem suffered by many foreign companies some 12 to 18 months after entering the Japanese market using an agent or distributor. The problem is the sudden realization that despite what initially seemed a good contract negotiation, they are receiving a far less than expected percentage of the price their products are being sold for in the Japanese market.

This situation can occur for a variety of reasons; some, such as distributor non-performance, channel conflict etc., are not specific to Japan and occur in every international market. What is a unique characteristic of the Japanese market though is consumer expectation of quality and originality and the willingness to pay unusual premiums for it. Even though increased competition from a variety of lower-cost competitors, including online merchants, has reduced price markups in the Japanese market dramatically when compared to levels of 10 - 15 years ago, there still exist (as shown by the recent business news report noted above) some incredible differences in Japanese and US or European prices for identical products and services.

When starting business in Japan and entering into initial distributor contract negotiation, many foreign executives are probably unaware of the potential value of their products in Japan, but you can guarantee that the Japanese distributors on the other side of the negotiation will have a very good idea of the value. Many foreign companies in those initial distributor contract negotiations agree to a transfer price (the percentage of the selling price paid by the Japanese distributor to the foreign company) calculated as a percentage of their home market list price, sometimes with a small (10% - 15%) allowance for Japanese market markup built-in. Later the foreign company realizes the true value of its product in the Japanese market and finds that the distributor is selling at 50%, 100%, maybe 200% more than the home market list price and of course the foreign company is only benefiting by cents on the dollar. Tensions are often further heightened because the foreign company has probably made substantial investments in product modifications and enhancements specifically for Japanese customers and most likely at the request of the Japanese distributor. The result is frustration and maybe even litigation as the foreign company becomes convinced it is unfairly subsidizing the distributor's very healthy margins.

"In the past 13 years I have not met any foreign company executive who said that his/her distributor was amazing."

While high price markups are most obvious in the luxury designer and high-brand goods and gifts markets, automobiles, even those made in Japan, are similarly more expensive here than in the US and Europe, as are most automotive components, clothes, consumer goods, electronics, sports equipment, food and furniture. Neither is markup isolated to the consumer sector: in the corporate sales arena Japanese companies similarly tend to pay higher prices for the products and services they buy than do their foreign counterparts.

While there are undoubtedly good Japanese distributors with great win-win partnerships with foreign companies, in the past 13 years of doing business in Japan, I have not met any foreign company executive who said that his/her distributor was amazing, that they were creating massive value and that there was no way their performance could be improved. In fact many of those executives felt they had been blindsided by their distributor in the initial contract negotiation and almost all felt that the percentage of actual revenue they were receiving was unreasonably low compared to other markets they dealt in.

So how can a foreign firm most successfully partner with a Japanese distributor?

2. Japanese distribution contract negotiation >>

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