Export Knowhow

How to enter the Japanese market – business partner models and other options

When considering market entry into Japan, it is important to know your options. What kind of local partner would be most beneficial for your business in Japan? And what about opening a local office or subsidiary?

Doing business

Many thanks to Pascal Gudorf from ECOS Consult, who provided the key information this article is largely based on.

You have an innovative product, did your market research and have decided that Japan, being the third largest economy in the world with a population of about 130 million people with a high purchasing power, is the right market for you to expand to. As it is often stated, Japan is not an easy market to enter and requires patience and a long-term market strategy. Relationships in the Japanese business environment are key, and they can seldom be defined by legal contracts alone. You need to build trust and cultivate those relationships, by showing that you are 100% committed to your business partner and customers. Another important aspect to keep in mind is that Japanese still prefer to work with other Japanese, or, as the mindset is slowly shifting, at least with Japanese-speaking partners, who are well acquainted with Japanese business culture.

Needless to say, all this will make it difficult to operate your Japan business directly from Switzerland, which leads to the next important question: What kind of business partner would be most beneficial for you? Or would it even make sense to open your own office or subsidiary in Japan?

When looking for a local partner, there are various groups of potential candidates, which offer different advantages and disadvantages:

General Trading Companies
(e.g. Mitsubishi, Mitsui, Sumitomo, Marubeni, Itochu, Sojitz)

There is a number of general trading companies (Jap.: sōgō shōsha) in Japan, the biggest being Mitsubishi, Mitsui and Sumitomo. The sōgō shōsha business model is very unique to Japan, as those trading companies are huge conglomerates, trading a variety of goods and materials in many markets in- and outside of Japan and thus having extremely diversified business lines. For example, Sumitomo Corp. alone operates more than 63,000 employees in over 900 companies across 65 countries, in six sectors ranging from metal products to digital and media. Japanese general trading companies enjoy a high prestige, they have a wide network, and can provide access to large developers and third market business. However, they are less interested in pure trading and distribution and provide very limited support in marketing and sales. Instead, sōgō shōsha focus more on large projects and investment. Therefore, it can be extremely difficult for foreign SMEs to work with such companies as partners, unless they are able to offer innovative products in combination with large product volumes.

Pros:

  • High prestige, name value
  • Nation-wide network and access to large developers
  • Used to working with international counterparts
  • Can bridge liability gap and other commercial conditions

Cons:

  • Bureaucratic and less flexible
  • Often will take Japanese customer’s position instead of that of EU supplier
  • Size mismatch, limited pro-activity as long as business is small
  • Less interest in pure trading and distribution, focus lies more on big projects and investment
  • Might be focused only on projects within same group (Mitsui → Mitsui Fudosan)

Specialized Trading Companies (Japanese)

A more likely potential partner candidate could be one of the numerous small to mid-size trading companies specializing in a certain sector like automotive, chemicals, food stuffs, cosmetics, etc. They usually have good access to the industry and a proactive sales approach, however, they are less prestigious than the powerful sōgō shōsha and often operate regional instead of nationwide. On the other side, depending on the size of the trading companies they can be a good fit even for very small Swiss enterprises.
What needs to be taken into consideration is that many of those companies have limited experience with foreign suppliers, which can cause intercultural misunderstandings and conflict over different expectations. It is important for Swiss SMEs to take their time to look for the right partner and to find out in advance, whether this partner has the business capacity to reach the desired targets for the Japanese market.

Pros:

  • Good access to industry and technical knowledge due to specialization
  • More incentive-driven and pro-active sales approach

Cons:

  • Less prestige
  • Less experience with foreign suppliers
  • Regional instead of nation-wide coverage
  • Often will take Japanese customer’s position instead of that of EU supplier

Trading Companies of European Origin

There are also a few trading companies of European origin that have been operating in Japan since a long time (e.g., DKSH, Correns, Irisu K.K., SKW Asia), usually with a combination of European managers and Japanese sales staff. Working with them provides the advantage that they can bridge the cultural gap between Europe and Japan and that they can take care of after sales, which is highly important in Japan. They can be interesting partners for Swiss SMEs that have products which fit their portfolio, especially in the machinery or chemicals sector, and which can provide a certain product volume.

Pros:

  • Combination of Japanese sales staff and European manager
  • Technical knowhow
  • Bridging cultural gap
  • Can take care of after sales

Cons:

  • Products might not fit in portfolio
  • Might have less access to construction or real estate projects
     

Sales Agent, Representative or Consultant

The fourth solution with a partner would be a sales agent, representative or consultant, who works for the Swiss company independently. Those market specialists usually have a good network and vast experience in the required sector and can support the business development in Japan as required. Disadvantages when working with such a partner are that they need to get hired directly and require compensation for their services by the Swiss company; furthermore, in most cases they will be unable to handle after sales.

Pros:

  • Flexible
  • Supporting business as required
  • Not in contract route – Swiss company will do business directly.

Cons:

  • Needs compensation for services
  • Incentive, commission-based scheme only sustainable above certain volume
  • Cannot bridge gaps in contract terms
  • Cannot cover after-sales
     

Branch Office / Own Subsidiary in Japan

Other than finding a partner in Japan, there is also the option to establish an independent base for business operations in Japan. Swiss companies can either open a branch office or own subsidiary, which would give the Swiss company full control of market strategy, personnel, etc. Going this step also shows Japanese clients that the company is fully committed to the market. However, it also requires high initial investments, and it will take time to build up business connections, in addition to finding suitable, bilingual staff and train them accordingly. The main difference between a branch office and a subsidiary is that a branch office does not have its own legal corporate status, and therefore the Swiss headquarter is ultimately responsible for all debts and credits generated by the activities of its Japanese branch office. In addition, it should be noted that a branch office cannot be turned into a subsidiary easily; it has to be closed first, which can be cost-intensive. Opening an office or a subsidiary in Japan is usually recommended for financially stable companies that ideally already have some business connections on the market. For an initial market entry, it will be more beneficial for most SMEs to first build a reputation for their products in Japan with the help of a partner.

Pros:

  • Control of strategy, personnel, commercial terms, incl. pricing
  • Shows commitment to the market
  • Direct communication with customer
  • Over time, better market insights and knowhow transfer to headquarter

Cons:

  • Higher investment
  • Challenge to hire pro-active and experienced sales staff
  • Need to closely guide and train staff
  • Requires time to build up contacts
  • Need to divorce and/or find arrangement with current partner
  • As entity under Japanese law, need to follow Japanese rules and customs, e.g. contract in Japanese language

Market entry in Japan

Still unsure, which option would be the best fit for your company to step into the Japanese market? Contact us: Jacqueline Tschumi, consultant for Japan in coordination with the Swiss Business Hub Japan in Tokyo can help you find the optimal solution for your business, and can support you finding a partner or establishing your base in Japan with their broad network of lawyers, recruiters and market experts.

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