Setup a Japanese office?
In the previous section on the power of networking in the first month starting business in Japan, we noted the value of networking to gather the information your company needs to decide how best to start in the Japanese market. That data puts you ahead of many executives of foreign companies who, when starting business in Japan, come here for one or two weeks of meetings, sign an exclusive distribution agreement with a Japanese distributor and return home with no real understanding of the Japanese market value of their products. For many of those executives, it was a foregone conclusion that they would start business in Japan using one of the many Japanese distributors, resellers or trading companies. Maybe their decision was unavoidable because their company can’t justify the cost to set up a Japanese office; maybe they decided not to set up a Japanese company or office presence to manage their Japanese business because of preconceived ideas of doing business in Japan resulting from hearing those infamous Japanese market and business myths. Of course it might simply have been that when faced with the Japanese language and business culture, setting up a Japanese office seemed too difficult and using a Japanese distributor seemed easier.
Deciding whether or not to set up your own Japanese company or branch-office to locally manage your Japanese business, is the first of many critical decisions that decide a foreign company’s success or failure doing business in Japan and the value it will derive from the Japanese market. This decision cannot be made without first-hand experience of the Japanese market and definitely not without knowing the Japanese value of your product. If you spent your first month starting business in Japan by aggressively networking and information gathering, you will now have some useful first-hand experience and very likely have a good understanding of the potential Japanese market value of your products or services. You are now in a position to reconsider previous decisions about setting up a Japanese office or company to manage your Japanese business locally, with all the control, accountability, growth opportunities and brand equity advantages that a Japanese subsidiary company or branch-office can enable. Alternatively, you might now decide that a previous decision to set up a Japanese subsidiary company or branch-office would result in unjustifiable cost and that a distributor can generate more sales and profit. The key point is that after the networking done in your first month in Japan, you now know to make the best decision for your company.
So how do you make the final decision?
Having lived and worked in Japan for over two decades, including ten years managing Venture Japan’s relationships with many clients, I am fortunate to have a better than average understanding of the Japanese market and the cost, ease, potential pitfalls and potential profits of doing business in Japan. I have seen many businesses succeed, but sadly seen many that failed, almost always because in the first year or two they spent too much and had unrealistic sales expectations. In general, I believe that if your company is serious about success in the Japanese market, has the budget available, and clearly understands its sales potential, then incorporating a Japanese company to locally manage your Japanese business is the most likely way to succeed. Your Japanese subsidiary company or branch-office is not a third-party entity: its employees are as accountable for its performance as are those of any other sales office you have.
Of course there are situations when it doesn’t make economic sense to set up a Japanese company or office to locally manage your Japanese business, such as:
- If your company simply can’t justify the investment.
- If your company doesn’t have the head-office management experience or resource needed to manage a Japanese office.
- If you are not expecting high growth in Japan.
- If you can contract with a reputable local Japanese partner such as Venture Japan, that can manage your distributors as your local agent,
- If your Japanese office’s projected sales won’t cover its expenses within 3 years of incorporation.
- If it’s more tax-efficient not to set up a Japanese office and thus avoid creating a permanent establishment “PE” for tax purposes.
- If you do business in a tightly regulated industry dominated by a few large Japanese distributors.
Consider though that with a few exceptions (such as Yahoo! Japan), the foreign companies that have succeeded best in the Japanese market are those such as Amazon, Dell, Microsoft, IBM, HP, Facebook, Apple, Google, LVMH, Coach and many others, that setup Japanese subsidiaries. In business, the best people are accountable for a business’s performance; sadly, distributors by their very nature (they are after all third-party companies with their own business goals and agendas) are anything but accountable.
Assuming you spent your first month in Japan aggressively networking and information gathering, then by the second month you should have a pretty good expectation of your product’s value in the Japanese market. By comparing with your home market sales statistics you should then be able to extrapolate some reasonable 3 – 5 year revenue forecasts which will be invaluable for decision-making. Keep in mind that many foreign companies that do succeed in Japan, find that their Japanese revenues per employee exceed those of their home country, so using your home country performance as a benchmark for Japanese performance is not unreasonable. Anyway, why would you want to measure your Japanese performance any less stringently than that in your home market?