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«About Japan » Webinar SeriesJapan Entry Strategy

Philippe HuysveldGBMC (Global Business & Management Consulting)

www.gbmc.biz

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Table of Content• Introduction• Part 1: Indirect Sales Approach• Part 2: Direct Sales Approach• Part 3: Strategic Alliances & Partnerships• The Most common Market Entry Scenarios (4)• Parameters impacting the choice (4)• Recommendations• Q&A Session

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Introduction• Own level of cost, benefits, (dis)advantages, risks and

legal/tax issues for each Entry Strategy• Does your company really need an office? Virtual office,

shared office, liaison office, full spec office ….• Most SMEs use the Indirect Sales Approach (Part 1) but there

are more options (Part 2 & Part 3)• General factors: market’s potential, international expertise,

available (internal) resources …• Specific factors to your business requirements

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About your Homework• Decided to review your Entry Options?• Check with the Centre our related Report

(60 pages): we provide exhaustive data (examples, case studies, tips), analyze over 50 EU Success Stories in Japan and make Recommendations.

• Assess each Strategy options, choose the appropriate Entry Method & adopt the optimal Legal structure!

• It is recommended to search for PRO advice for complex operations.

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Key Steps in entering the Market• Evaluate your competitive advantage• Evaluate potential market segments for entry• Determine the best Products/Product Lines to launch• Estimate the required Resources (Start up costs)• Determine the limitations/constraints on the firm• Choose the Market Entry Strategy: safest way? most

profitable way? most practical way?• Involvement at the highest level of Management is key,

developing Global Commitment towards the Project

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Part 1: Indirect Sales Approach• Exporting is the first Entry Strategy used by SMEs. (+): - one of the most traditional, well-established and straightforward form of operating in foreign markets.

- it requires a significant involvement and investment in marketing strategies, working together with local partners.

- it is however fairly simple with low costs & low risks. (-): - often high transportation costs, trade barriers, tariffs, exchange rate fluctuations …

- lower control of distribution and difficult communication with local representatives.

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Agents & Distributors• They have local knowledge (language, business, network)

essential for conducting locally the business. • Agent = your Sales Rep, Distributor = your Customer.• Careful partner selection is key and especially recommended

when choosing a sole distributor. • The need for exclusivity might be justified by the requirements of

the business, especially when a lot of localization/customization work and investment (advertising campaign) is expected from the Japanese partner over the LT.

• When different product lines are being introduced , a multichannel approach might suit better.

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“Sogo/Senmon Shosha”(+) Trading Co’s are ideal business match makers:

• They gather a lot of info about Industry trends, about their clients, their suppliers and their business partners ….

• At the centre of the country’s huge conglomerates (系列 ), they are well positioned for making formal introductions.

• they are often shareholders of major supermarkets, department stores, specialty retail chains & “combini”.

(-) They operate on the basis of economies of scope, seeking to act as intermediaries for as many vendors as possible, the vendor may end up feeling underserved.

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Case Study – IRIS (Distributor)Business Background: Image Recognition: (Source: BJA, 1997)

IRIS made a breakthrough in Japan in 1996. The company had a booth at “COMDEX Japan 95”, a computer fair in Tokyo, and was displaying the IRIS Pen, a pen-sized OCR scanner.

This unique technology attracted the attention of CATENA Corporation, a big Japanese distributor, leader on the Japanese translation market.

This first contact led to a cooperation agreement with CATENA, aiming at developing a new product (Logovista) for the Japanese market: a translation pen that reads English and translates it into Japanese. The new product became available in October 1996.

About the Distributor:

Through long product meetings, 6 months of joint development and 3 months of intensive testing, the Japanese distributor bothered to release a quality product, completely adapted to the local market. The software, the manuals and the on-line help were fully localised 日本語

Key factors:

Besides the technology, the dedication of the distributor was equally essential to the success.

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Part 2: Direct Sales ApproachThe Question: Does my company really need an office? What are the Benefits and Costs for the business?(+): - Get closer to the customers (a key account might ask for a presence in Japan or for same time-zone response to questions)

- Increase Sales (Japanese customers prefer to deal locally in Japanese with local staff)

- Make more margin (less dependency on distribution channels)- Monitor competition and market trends (= customer feedback)

(-): - Start up costs (legal and administrative costs)- Operating costs (office rent, accounting+ legal+PRO services)

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Representative or Liaison Offices• Standalone Market Entries are done by companies ready to

take capital risk & to gain over time the knowledge/experience • One of the factors in deciding about the type of Entry Strategy to

go for is the cost or investment size.(+): no registration needed >> no cost (ideal for transition period)(-): - no sales permitted, no bank accounts, no office lease in its own name.

- not a legal entity, the company representative usually contracts on an individual basis.

- it does not show the LT commitment of the company.

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Branch Offices vs Subs• for some companies, a Branch as an extension of

Headquarters fits best with their legal and tax structure.(+): - May open bank accounts, office lease in its own name.

- Sales permitted, less costly, much simpler procedures. (-): registration needed but no own legal corporate status. • A subsidiary is however the preferred structure: (-): in spite of higher registration costs(+): - Sign of LT commitment to the Japanese Market

- Ability to sell shares of the Japanese company to raise funds for strategic operations

- A legal shield that prevents liability in contract and labour disputes to impact Headquarters

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Subsidiaries• Specificities:

• limited liability of the shareholders to the assets, • separate corporation from Headquarters, • registration needed (higher registration costs)

• Joint-stock corporation or “Kabushiki Kaisha” (KK): separation of ownership from management, yearly approval of financial statements, financial results to be published, with or without board (different options possible)

• Limited Liability company (LLC) or “Godo Kaisha” (GK): unification of ownership and management (owners=managers), greater freedom (in writing the articles of association), also suitable for a small-scale business

• Attention: GK can be upgraded into KK but not a Branch office!

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Basic Comparison between 3 common types of business operations (Direct Sales)

  Branch Office KK (joint-stock) Sub GK (LLC) Sub

Capital None (in theory) 1 yen (in theory) 1 yen (in theory)Number of investors - 1 or more 1 or moreClassification for tax purposes

Foreign corporation Domestic corporation

(foreign-affiliated)

Domestic corporation

(foreign-affiliated)Liability toward creditors

Unlimited Limited to amount of equity participation

Limited to amount of equity participation

Number of executives required

Min. 1 resident Representative

Depends on company size and if KK is publicly traded or not

Min. 1 resident Representative

Shareholder meeting None Every year None

Losses of the entity Losses are included in the Head Office’s income statement.

Losses of the subsidiary are not included (before consolidation).

Losses of the subsidiary are not included (before consolidation).

Distribution of profits - Allocated according to equity participation ratio

Depends on articles of association

Taxation of profits Income arising within Japan is taxed in principle

Taxed according to profits of KK and shareholders

Taxed according to profits of LLC and shareholders

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E-Commerce or E-business Operations• Selling products directly to Japanese end-users• No intermediary costs. Higher control over prices and profits. • Severe competition: Rakuten, Amazon, Yahoo Japan ….• Unless new entrants create a “compelling multichannel

proposition”, the Entry Strategy in B2C online business should focus on less-developed market segments (smaller but growing faster) like, for example, online groceries and skin care/cosmetics.

• High-level service, packaging & speedy delivery should be key elements of the Marketing Mix.

• If interested, other Webinar: “Know your Client and Adapt”.

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Case Study – BARCO Japan (Sub)Business Background: Advanced Electronics (Source: BJA, 1997)

BARCO gained a foothold in Japan in the early 80s with video projector sales entrusted to local distributor Electori. Other distribution contracts for other BUs of the group followed soon.

In 1995, BARCO opened a Liaison Office (1 person) in Tokyo, renting space from a distributor.

Mission of the Liaison Office:

Preparation of take over of existing video projector business from distributor-importer Electori: transfer of key Japanese staff from the distributor, buy back of Electori’s stock in Japan …

Local business development and Project Management in new key Market segment (Planetarium-Simulation) with potential new key Account (GOTO Optical).

Company set up preparation: office search in Tokyo, staff recruitment, registration procedures

Key factors:

Intention to tap into new market segments not covered by current local distributor

Careful preparation of the (sensitive) take over of the distributor’s activities

Ambition to progressively open offices in various towns of Japan.

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Part 3: Strategic Alliances & Partnerships• Strategic Alliances are simply a business-to-business collaboration,

formed for all types of purposes, and provide immediate market access and knowledge, without the need to engage in a formal agreement or to commit to a LT contract.

• Partnerships can be formal or informal. An informal arrangement is one where a foreign firm agrees to work together (to produce/market a product/service) with a local firm.

• A formal partnership is when there is a legal agreement to do the same thing but with detailed objectives and targets defined.

• Partnerships require a long-term commitment and should not be rushed into. The nature of the collaboration depends on the complementary resources to be shared.

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Formal PartnershipsLimited Liability Partnership (LLP) or “Yugensekinin Jigyo Kumiai”

• registration needed but no corporate status• foreign individuals/corporations abroad can be members• limited liability• greater freedom (no need for shareholder and board

meetings, flexibility in sharing profits). • taxes paid by equity participants rather than by LLP itself• Examples: joint R&D by universities/ventures/corporations,

movie making, venture spin off, group of SMEs …

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Licensing & Franchising Agreements• Licensing: (example: Disney Japan to apparel/toys marketers)

• best used by co’s with distinctive and legally protected assets• adaptation of the product to the market done by the “licensee”• Allows rapid entry, with little investment and quicker returns.

• Franchising: (example: 7-Eleven convenience stores)• is becoming a more popular entry strategy• a rapid replication strategy with the benefit of having highly motivated

owners/managers at each outlet.• suitable when strong brand recognition in your own country• not suitable for culturally based products or services. • business format & operating models are fixed

>> less adaptable to local trends or tastes.

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M & A (Mergers & Acquisitions) • a quick way to launch your business in Japan rather than

incorporating your business from scratch, as a new company. • More and more Japanese SMEs are for sale >> opportunities!• Acquisition is preferable in the following cases:

• When speed of entry is an important factor• When barriers to entry (like high economies of scale of local

competitors) can be overcome by acquisition in the targeted industry

• When the entrant firm lacks key competencies in the new business area.

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Joint-Ventures• the most sophisticated type of Partnership• EU-Japan examples: Sony-Ericsson, Renault-Nissan• creation of a third independent company owned, but

not necessarily managed, by the partners. • Joint-Ventures (JVs) require financial, time and

resources commitment from all partners. • they are viewed as a practical vehicle for knowledge

transfer, such as technology transfer, and can be a first step towards a complete acquisition.

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Case Study – Unic Japan (M&A)Business Background: professional coffee machines:• Unic, French SME, has been active and successful in Japan since 1985,

selling through an importer coffee machines to bars and restaurants, as well as servicing them.

• In 2007, the importer was in financial trouble. Unic grabbed the opportunity and took over the importer’s assets to create own subsidiary Unic Japan.

About the M&A:• facing initial distrust from existing customers, it took 2 to 3 years (kind of test

period) in order to overcome it and to get acceptance Key factors:• Human Resources Management: the previous boss of the importer became

the new boss of the subsidiary.

(Source: Investir au Japon maintenant, CCE International #545, Sept. 2009)

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The Most common Market Entry Scenarios (#1)

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The Most common Market Entry Scenarios (#2)

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The Most common Market Entry Scenarios (#3)

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The Most common Market Entry Scenarios (#4)

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Parameter (#1): by Company Size & Risk-levelFor Small Firms, Indirect Sales are the obvious Entry Strategy. A more LT working formula is the careful appointment of a (exclusive) Japanese distributor.

For Large Firms, with different BUs selling different kind of products through different sales channels, the set up of a Subsidiary is the obvious Entry Strategy.

M&A, JV,

sub.

Liaison/Branch

Offices

Distributors, Partnerships

Licensing-Franchising

Agents, Trading Companies, E-Commerce

SMEs/Low Risk

LARGE Companies/High Risk

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Parameter (#2):by Degree of Product Complexity

Centre’s Report Results: Activities of the SMEs established in Japan (Direct Sales) were more oriented (60% of total) towards providing high technology goods and services. Comparatively, food-related SMEs were more oriented towards finding local partners (Indirect Sales).

JV, M&A Subsidiary, Partnership

Distributors,

Licensing-Franchising

Agents, Trading Companies,

SIMPLE (« box sales », food, non-technical/standard products, requiring less support & service)

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Parameter (#3): by Types of Sales Channels

Depending on their line of business, some companies have a limited number of strategic key accounts or OEM accounts. In that case, a first phase Entry Strategy is to appoint an OEM sales representative to sell on a direct basis. Later, the foreign company can set up a Direct Sales/Joint-Venture operation or appoint a Japanese systems house.

Sub., OEM sales

agent, JV

Distributors, JV,

Partnership, Subsidiary

E-Commerce, Franchising-Lincensing

END-USER/FRANCHISEE/LICENSEE SALES

DEALER/

RESELLER

SALES

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Parameter (#4): by Degree of Market Approach

M&A

JV,

Subsidiary

Liaison/Branch Offices,

Distributor, Partnership

Indirect Sales, Licensing-Franchising

MARKET APPROACH PHASE

MATURITY PHASE

For the foreign entrant, Sales Growth & Market Potential will impact the level of Commitment to the Market of the company, as well as the level of Investment. With time and efforts, the company will evolve from an Initial Approach Phase towards an Expansion Phase and ultimately a Maturity/Advanced Phase.

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Recommendations• Don’t rely too much on second chances (rebuilding or starting

over). Try to get it right from the start by carefully planning.• When setting up business in Japan, especially involving entity

issues, seek appropriate legal/professional counsel. Consider a capital under 100 Mio JPY (lower Corporate Tax) and above 5 Mio JPY (to get Business Management Visas).

• When going for Indirect Sales, carefully select the right partners, dedicated, who are ready to prioritize your products.

• When going for a M&A, beware of HR & Change Mgt issues• When going for a JV, keep the Japanese cultural touch of the

operation: what counts most is to be local.

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Q&A

• Questions submitted previously• Please submit your questions, if

any, via the chat option

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Many Thanks!ありがとうございました。

Philippe HuysveldGBMC (Global Business & Management Consulting)

www.gbmc.biz