How to manage a Japanese company
When setting-up business in Japan or any other foreign market, there is a constant risk of being scammed by self-appointed experts. In Japan, these “bilingual mafia” are often bilingual professionals and executives who, while purportedly experts in the various aspects of doing business in Japan, with a smile and a bow will happily divert your company’s precious Japanese market-entry cash into their corporate coffers. Often they will also introduce you to their network of third-party providers, who are equally unscrupulous at relieving your company of its money without producing results. They then revert to those infamous myths of doing business in Japan to justify their failure to produce results. Doing business in Japan will be extremely expensive if your company falls foul of the bilingual mafia and if Japanese market-entry and business setup costs are not properly controlled.
Fortunately, the days when a company needed to spend a huge amount of cash and valuable management resource incorporating, managing, and recruiting its Japanese subsidiary and team are long gone. Japan’s Company Law introduced in 2005, reduced the cost and complexity of Japanese company incorporation, while two decades of deflation and increased competition among service providers such as Venture Japan, has reduced the cost of back-office services such as accounting, payroll, HR and legal support, and of recruiting bilingual Japanese executives, managers, and staff. In 2000, it cost US$15,000 and up to incorporate a KK kabushiki kaisha company; today Venture Japan offers the same service for as low as US$3,000. In the late 1990s, I managed the KK kabushiki kaisha subsidiary of a small US software vendor whose financial department seemed to spend almost as much time in Japan administrating the 6-person Japanese company as they spent in the US administrating the head-office. Worse, they were spending US$10,000 and up every month with a big-5 accounting firm’s Tokyo office and an international law firm’s Tokyo office to manage the KK’s monthly bookkeeping, payroll and legal maintenance. Adding in yearend financial statements and tax-returns, I estimate they spent around US$150,000 a year administrating that subsidiary. These days those same services cost around US$15,000 – US20,000 a year from a service provider such as Venture Japan. Recruiting Japanese staff is still expensive but again, recruiters such as Venture Japan with 17.5% success fees are half of the fixed “Sorry Chris, there’s no way we can come down from 35% of full first year compensation.” recruiting commissions of the early 2000s.
Your company’s investors, especially unforgiving private angel investors, will naturally expect your company to tightly control its startup and ongoing costs of doing business in Japan. I have been fortunate to deal with several private angel investors in the past two decades and one, Bruce C. (a very successful business-litigation attorney and angel investor in southern California) who was considering an investment in a US software company of which I was then President, said to me “Chris, when I put my money into a company, I expect that company to be miserly and scrape maximum value from every penny I invest”. That’s an excellent startup philosophy and one, as I mentioned to Bruce C. while pointing to my ‘compact’ US$10/day rental car in his parking lot, that I have followed for the past three decades.
When doing business in Japan, success is not just about having a great product and an aggressive, intelligent and winning attitude, it’s the ability to manage cash and deliver early successes on a shoestring budget. The ongoing challenge is then to intelligently reinvest the proceeds of those successes to build consistent growth. This applies not only to Japan but everywhere: most venture capitalists I know have told me of portfolio companies with otherwise great prospects that failed “……because they spent too much too soon……”.
So, your company wants to set up and start business in Japan, does not yet have the $billions cash reserves of Microsoft, Apple, Google or Facebook, wants to compete and succeed here, and your President, Board and stockholders share Bruce C.’s cash management philosophy; so just how does your company set about getting maximum value from every penny it spends doing business in Japan, the country still reputed as being “……one of the most expensive places on Earth……”?
When setting-up business in Japan, just as when doing business in any other market you enter, your company has 3 choices of how it spends its Japanese market-entry cash:
- It can “spend money like water” (maybe hoping to drown its competitors?).
- It can starve its Japanese subsidiary of resources in the hope that it will somehow become more competitive.
- It can create an appropriately funded, but not over funded, Japanese subsidiary that can confidently get out there and get the job done.
Those US PC vendors mentioned in the section on the first 3 months of business in Japan tried the first approach but, sadly for Japanese consumers at the time, they failed. They probably expected that setting up large Japanese subsidiary companies, leasing very expensive offices in Tokyo’s most prestigious locations, and launching nationwide advertising campaigns, would assure success doing Japanese business. Somebody, probably an “expert” at one of Tokyo’s infamous bilingual recruiting agencies, gave them bad advice: unfortunately Japanese consumer habits and buying patterns are often very different from those of the US and Europe. It takes more than simply mass-marketing to break Japanese consumer habits and secure a foothold. This approach and its potential failure continues even today: we recently had experience of a household name US company that tried a similar approach in the Japanese B2B market and closed its business after less than 9 months……
We can see the second approach in those companies which, as noted in the section on deciding whether to set up a Japanese office, blindly start business in Japan with a Japanese distributor, reseller or trading company and a year later complain that “That darned distributor is useless! We can do 10x more business in Japan than we’re doing now! XYZ Corp. did 30% of its revenue doing business in Japan last year!”. Of course those companies will probably never commit to the investment needed to more effectively compete in the Japanese market with a wholly owned subsidiary company; they wrongly perceive because of a lack of reliable data, that it will cost too much.
The third approach, an appropriately funded and aggressive Japanese subsidiary company, owned by a company that shares Bruce C.’s philosophy of extracting every ounce of value from every Yen it spends, is, as elsewhere you compete, the most likely to succeed in the Japanese market. So, sometime early in month 3 of those first 3 months doing business in Japan, after you have projected your potential Japanese market revenues for the next 3 years and decided the type of presence and entity you will have in the Japanese market, you can set about keeping Bruce C. happy and make your company’s Japanese subsidiary a success without breaking your company’s bank in the process. It starts with probably the most difficult challenge faced when starting business in Japan: controlling the cost of paying good Japanese bilingual executives, managers, and staff, while keeping them well-paid and motivated to succeed.