Terrie's Take 470 -- Benefits of joint-ventures, ebiz news from Japan

Sun May 25 23:22:45 JST 2008

* * * * * * * * * T E R R I E 'S T A K E * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, May 25, 2008 Issue No. 470

+++ INDEX

- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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+++ WHAT'S NEW

Those of us living in Japan forget the perception that most
people overseas still have of the country being broken and
down on its luck. Today's headlines were about how 10% of
Japanese are now over 75 years old and that the population
will decrease below 100m by 2045. That fact will be in
pretty much every foreign newspaper tomorrow and with China
growing by 10%-12% a year, it's easy to see why business
people overseas are ready to write Japan off.

But while the Japanese economy is growing at just a couple
of percent annually, it's worth remembering that Japan
still has a higher GDP than China, until 2010 anyways, and
that per capita, the Japanese produce a GDP of US$34,252
versus US$2,017 for China. So there is a huge difference in
efficiencies and productivity.

Of course those of us actually doing business here know
that while everyone has the jitters about the future, the
economy itself is still in reasonably good shape, thanks to
the incredible burst of exporting that began in 2004 and
the fat of which is still driving activity forward at high
levels. As we have mentioned in earlier Takes, Japanese
companies have over the last 4 years stored up substantial
surplus capital and resources, because they are truly
fearful about a future downturn -- especially given Japan's
military and psychological dependence on the USA.

This level of national paranoia by businesses is creating a
very favorable situation for foreign companies wanting to
enter the Japanese market. While it isn't necessarily any
easier to get started here, there is definitely an interest
by Japanese firms to do tie-ups with an aim to protect
their futures.

[Continued below...]

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[...Article continues]

In the past, the typical process for companies wanting to
export into Japan has been for the CEO or a senior manager
to make a business trip here and visit a trade show. Then
if the opportunities look interesting, the company will
contact the local government export organization: be it the
U.S. Commercial Service, Austrade in Australia, FAITC in
Canada, NZTE in New Zealand, and/or the Japanese export
organization, JETRO. In the US, some states also have
export assistance programs, such as Ohio with its Global
Markets Division of the Ohio Department of Development.
The company will then engage one of these organizations to
help them explore the market and find a distributor. This
approach is popular, and you almost never see a new firm
decide to jump into the Japanese market alone.

While this is all very logical, if you are a small firm,
your first question needs to be: "Should I be in Japan in
the first place?" If you have limited resources, then the
answer is to be found by deduction. Those companies in
lower-end consumer products or commodities might not even
give Japan a second look. Hard experience teaches that the
Japanese are indeed conservative about changing sources of
supply and marketing new consumer products. China might be
less discriminating and more interested in paying higher
spot prices to procure a certain commodity.

But if you have a product or service which is famous (as a
brand), or you represent certain contracted rights that no
one else can assume, or have patented technology, or
special know how or business services which can be embedded
into a Japanese firm's product/service lineup, then you
will definitely want to be talking to the Japanese. There
are numerous examples, daily examples, of Japanese firms
paying good money to buy their way into a relationship that
will give them a competitive advantage here in Japan. We
know of cases where the amount of upfront cash injected
from the Japanese side has been in the tens of millions.

Thanks to the last 4 years of surplus, Japanese companies
are cautious but cashed up, and they want insurance against
the future. As a willing buyer, this means that your new
Japanese partner will usually take on the burden of
localizing the product/service, marketing and selling it,
implementing/supporting it, and of course collecting the
revenues that will form the basis for the foreign firm's
income. This level of take-up is what makes getting a deal
in Japan so attractive to smaller firms -- after you get
past the language issues, most of the hassles are taken
care of for you.

Although there don't seem to be any accurate records about
how many foreign companies enter the Japanese market every
year, it is our guess that about 500 deals of substance
(i.e., more than US$100K in revenues to the foreign firm in
the first year) would be reasonably close. We have heard from
sources close to JETRO that in the recent past they have
been handling several hundred viable leads a year. Add
this to the scores of firms helped by foreign government
trade organizations resident in Tokyo, and dozens more by
the many independent contractors, and the numbers add up.

But most of the foregoing is not new to old Japan hands,
and this wouldn't be Terrie's Take if we weren't trying to
introduce a new thought to our jaded readers for the week!

And the thought is this: since Japanese companies are doing
well, and since they inherently like to invest for the long
term, instead of looking at a simple distributor or
licencing arrangement, where you have little input into how
things are run, we have a better suggestion -- go into
business with the partner as a joint venture. Over the last
18 months our sister company Japan Inc. Holdings has been
asked by a number of firms to see if we couldn't get them a
stake in the Japan operation -- or, better still, a slice
of shares AND the same licence revenue they would have been
looking at previously.

As it turns out, this type of tie-up is being well
received. Yes, the Japanese firms do want to be able to control
the Japan operation and so want at least 70% of the business
(means they have control of the board) -- or occasionally
51% (means they can consolidate the profits into the
parent), but they also see the merit of having the foreign
partner involved. This is especially so since it signifies
greater commitment, and on a practical level it speeds up the
turn-around on problems and new technology. Another point
is that from their perspective they are typically looking
for monthly income to flow into the parent, not
unpredictable capital gains. So it is of little consequence
to them to let the foreign partner have a stake in the
business.

What about the comment that a joint venture may lock you
into an unproductive relationship? Well, firstly, a joint
venture does mean that the foreign partner has to second
at least one earnest representative to the Japan operation
-- but even the cost of this can be moved to the local
payroll so long as you negotiate it in the original
negotiations. Secondly, the partner's performance can be
ennumerated in a contract as well. They don't need to lose
their j/v if they don't hit targets, but the foreign firm
can reserve the right to open up a second market channel
if things don't go well. This lets them keep their
investment but provides a stick to keep things moving
along.

Although there are many companies looking at tie-ups with
foreign partners, there are still only a handful that are
actually capable of successfully conducting an
international relationship. So it is important to not only
get an offer of a business contract, but also to assess
whether the potential partner can actually execute the
business and maintain the relationship. In the IT space,
one such experienced player is Transcosmos, and in the near
future we will take a closer look at this company.

If, however, the intending partner is not skilled at
foreign business tie-ups, and many even larger firms are
not, then another way to tackle the problem is to bring in
a third party to help the two partners manage the
relationship. This then creates an interesting
triangulation of skills, commitment, and peer group
pressure. It also allows the foreign partner to keep some
key activities, such as brand name building (marketing) and
local technical support, separate from the dominant
partner. Just in case things don't work out in the future...

So the arrangement is:
1. Investment, localization, sales, and Tier 1 support --
the Japanese licencing partner
2. Technology and Tier 3 support -- foreign IP holder
3. Relationship management and Tier 2 support, marketing
-- operational strategic partner

And that's the end of this week's thought.

****************

Just a quick reminder that this coming Saturday is our
next Entrepreneur's Handbook seminar, with Terrie Lloyd
presenting a course on how to start, run, and sell a
company in Japan. This popular course has been running for
5 years and over 200 people have attended during that time.
This session will be held at the impressive Anaheim
University facility in Omote Sando, and our deep thanks
go to Dr. Al-Jamie and the rest of the team at Anaheim for
making the location available.

http://www.japaninc.com/entrepreneur_handbook_seminar

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+++ NEWS

- Local company PE ratios a bargain
- New ozone washing machine hits No. 3 spot
- Toray loses decision on US price fixing
- Suicide's vomit sickens 54
- Pension fund recommended to split up

-> Local company PE ratios a bargain

The Nikkei reports that the stock prices of service sector
firms with little or no export capability are now priced at
their lowest Price-Earnings (PE) ratios for some time. In
what seems to be a case of depressed investor sentiment
overwhelming economic fundamentals, even companies that are
looking to good increases in projected earnings this year
are trading at low PEs. The Nikkei give as an example
Culture Convenience Club, Japan's answer to Blockbuster,
which has a PE of just 11.9 times projected earnings,
versus the TSE First Section average of 16. (Source: TT
commentary from nikkei.co.jp, May 24, 2008)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20080524D23JFA07.htm

-> New ozone washing machine hits No. 3 spot

Sanyo's Aqua washing machine is ultra high-tech, and washes
clothes with just 7 liters of fresh tap water by
supplementing the wash with around 70 liters of used bath
water cleansed with ozone to remove any bacteria and odors.
Although the antibacterial properties of ozone have been
known for some time, Sanyo's Aqua breakthrough has been to
fit the unit with a very high-efficiency ozone injection
device. The product is about 1/3 more expensive than other
brands, at JPY150,000, but since its introduction in
February 2008 it has already leaped to the No. 3 position
for washing machine sales in Japan. (Source: TT commentary
from nikkei.co.jp, May 23, 2008)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20080523D23JFA10.htm

-> Toray loses decision on US price fixing

In yet another example of Japanese firms learning that laws
are to be taken seriously abroad, no matter how dominant
you are in your home market, Toray Industries has been
found guilty of price fixing on carbon fiber. Apparently
the suit began with a whistleblower lawsuit and is the
fifth in a series of carbon fiber price fixing law suits
against major (mainly Japanese) carbon fiber suppliers.
(Source: TT commentary from reuters.com, May 23, 2008)

http://tinyurl.com/5e7bvk

-> Suicide's vomit sickens 54

In a scene that could have been straight out of a Hollywood
apocalypse movie, a farmer who committed suicide by
drinking chloropicrin pesticide managed to vomit first in
the operating theater as he was having his stomach pumped,
and the resulting toxic fumes sickened 54 doctors, nurses,
and patients in the theater and nearby. Ten of the 54 were
themselves hospitalized and one patient with pneumonia is
still in serious condition. (Source: TT commentary from
google.com, May 23, 2008)

http://ukpress.google.com/article/ALeqM5g3u98BPeXoK3GPacN1AW07k-39Gg

-> Pension fund recommended to split up

A government advisory panel reckons that the government
needs to split its massive JPY150trn (approx. US$1.5bn)
of pension funds into smaller funds and diversify where
they invest the money. The recommendation comes as it
became public that the Government Pension Investment Fund
(GPIF), the entity that controls almost a trillion dollars
of funds, lost around JPY792.4bn (approx. US$7.9bn) in the
9 months ending December 31st, 2007. The GPIF invested
57.6% of its money into ultra-low yield Japanese
government bonds and less than 25% abroad. (Source: TT
commentary from bloomberg.com, May 23, 2008)

http://tinyurl.com/62t7gs

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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***------------------------****-------------------------***

+++ CANDIDATE ROUND UP/VACANCIES

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+++ UPCOMING EVENTS/ANNOUNCEMENTS

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-----------------------------------------------------------

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company in Japan.

This is an ideal opportunity to find out what is involved,
and to ask specific questions that are not normally
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and are Japan-focused.

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Events announcements are priced at JPY50,000 per week.
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***------------------------****-------------------------***

+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors at terrie.com.

-> In TT468 we said that Ohio was the second most popular
state in the USA for Japanese companies. A reader says
otherwise...

*** Reader: Actually, there are 465 Japanese registered
companies in Hawaii,  But their size in terms of employees
is small compared to the 380 Ohio firms. Maybe the
difference is in employee size rather than number of
companies? It appears that Hawaii has more registered
Japanese companies.

*** Our response: Without checking the number of sushi
restaurants and consulting firms, we stand corrected.
That makes Ohio the second largest employer of people
in Japanese companies.

***********************************************************
END

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+++ ABOUT US

STAFF
Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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