Terrie's Take 831 -- How to Find a Distributor in Japan, e-biz news from Japan

Terrie's Take terrie at mailman.japaninc.com
Mon Dec 7 00:43:21 JST 2015

* * * * * * * * TERRIE'S TAKE - BY TERRIE LLOYD * * * * * *
A weekly roundup of news & information from Terrie Lloyd, a long-term 
technology and media entrepreneur living in Japan. 

General Edition Sunday, December 06, 2015, Issue No. 831

- What's New -- How to Find a Distributor in Japan
- News -- Counter-intelligence unit established ahead of schedule
- Upcoming Events
- Corrections/Feedback
- Travel Picks -- Wakkanai in Hokkaido, Downtown shrine in Osaka
- News Credits

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PM Abe's government has set a goal of raising Foreign Direct Investment 
(FDI) in Japan to JPY35trn by 2020, up from just JPY100bn in FY2014. If 
it seems like Abe's 2020 goal is a bit of a stretch, well, yeah, it is. 
In August this year, Japan's import/export agency, JETRO, released its 
Global Trade and Investment Report for 2015. The agency said that while 
inbound FDI had risen for 3 consecutive years, a closer look shows that 
inbound investment is a puny 5% of Japan's outbound investment, and our 
guess is that much of the inbound money is going into real estate.

The fact is that there are probably only 200 foreign firms newly setting 
up in Japan each year. Getting quality/detailed statistics is difficult, 
largely because unlike the Japan Tourism Agency's (JTA) success story 
and their very impressive result data sets, JETRO has very little good 
news or firm data to share. For example, in a presentation in Thailand 
in May of this year, the JETRO Chairman said that just over 20 companies 
from Asia had set up in Japan in FY2014. Considering that there are more 
than 700,000 registered business entities in Thailand alone, this is not 
a statistic to be proud of.

It's not like the Japanese government is trying to make it difficult, 
though. JETRO will give you two months of free office space in any one 
of six different cities, and a long list of recommended service 
providers to help you get your company up and running. Visas are easy to 
get, and simply putting US$50,000 into your new Japanese company's bank 
account and committing to hire two employees (not necessarily hiring 
them first) will get you a very flexible 3-year "Business Investor" visa.

If only other countries in Asia were as easy.

The problem isn't the procedural issues -- although bureaucracy is of 
course a pain in Japan. No, the real challenge is what comes after -- 
recruiting, sales, marketing, localization of products, and the 
all-important customer support function.

In this Take, our second-last for the year, we share a collection of 
observations about how to find distributors for your products even 
before you commit to setting up a company. Our example will be in the 
Technology (IT/Software) space, because that's where most of the 
successful recent foreign entrants are focused (in the past it's been 
pharma and food), and it's our area of expertise.

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There are three distinct business models for foreign companies wanting 
to enter the Japanese market:

1. Set up and run your own company. This requires guts, determination, 
and at least 3 years of establishment and operating funding. For most 
tech firms this means about 10-20 staff, and an upfront budget of around 
JPY350m - JPY500m. You would be doing all your own management, 
localization, support, and senior direct sales in-house, which means 
finding senior managers who know the market. The risk here is that you 
pick the wrong managers, and lose 1-2 years plus your investment. This 
happens more than it should.

The advantage of running your own business is that you get to build your 
brand, keep 100% of the profits, and after some years of hard work have 
a solid team servicing a loyal group of customers and generating solid 
profits. A rule of thumb among market entry consultants is that Japan 
should provide about 10% of your global revenues and 15%-20% of your 
global profits.

2. Set up a joint venture. Joint ventures are popular because they mean 
that you don't need to "learn Japan" and instead focus on making a good 
partner choice, then supporting that partner to be successful. Most 
Japan-focused j/vs have the Japanese partner provide most/all of the 
start-up capital and staff, while the foreign firm provides the 
technology, collaborates on marketing strategy, and sometimes puts cash 
in. This approach certainly reduces risk, but in return it requires you 
to leave most of the profits in the j/v for some indefinite period. 
After things stabilize, possibly after 3 years, you can expect about 
10%-20% of the j/v profits come back as royalties. More than that, else 
the j/v may not be able to compete.

3. Find a distributor and supply localized product and 3rd tier 
engineering support. This is the most popular choice for smaller 
companies and larger ones with no Asia experience, because royalties 
flow shortly after sales begin. Apart from the localization and support 
effort you really only need to do regular visits to keep communication 
open. Distributors clearly carry most of the risk, so you have to 
imagine that whatever your product does in sales, the distributor will 
want to sell side services or their own add-on products worth 8-10 times 
what your's sell for. This creates a natural limiter on how much they 
can sell for you, in that they will be consumed ensuring a services 
business in each sale - but it is at least a foot in the door. Because 
of the risks, distributors will also ask for an exclusive, usually for a 
minimum 5 years.

J/Vs and distributor searches are the core of what our consulting team 
does, and we have a specific approach to market entry:

* About the Product
If your product needs to be sold in a B2B environment by real 
salespeople, you need to be aware of the minimum metrics an IT/Software 
company will use in deciding whether to be a distributor. These include: 
i) Do they already have sector expertise and no conflicting product? ii) 
Can a single experienced salesperson sell at least JPY3-5m average per 
month? iii) Does the product require significant integration (very 
desirable) to deliver? iv) Is the product directly addressing an already 
established market where little customer education is needed? v) Is the 
product protected by trademarks, patents, or does it have major market 
share in other developed countries?

If the answer is "yes" to most of the questions above, you've got a 
desirable product.

* About Your Targets
Finding a suitable distributor is all about either who you know, or it's 
a numbers game. "Who you know" is an infinitely easier approach, but to 
make it work you really need to have those key points (about your 
product) mentioned above suitably checked off with big fat YESes. Market 
Entry consultants typically have close relationships with a few favorite 
firms and will take your opportunity to that group. The advantage of 
this is that you could get a deal relatively quickly (3-6 months after 
the search starts), but you can be sure that it is unlikely to be 
premium priced. So if speed is your preference, look for a consultant 
with a list of market entry wins and see if they tend to do tie-ups with 
the same 5-6 companies.

If your software is groundbreaking in nature and there are likely to be 
few companies in Japan that will have experience with it, then you need 
to go see as many firms as possible, i.e., a numbers approach. You're 
going to be wanting to find a firm with both sufficient expertise to 
appreciate the value of what it is that you are trying to do, and an 
interest in selling it. When we have "difficult" products, we set a goal 
of contacting at least 30 companies, expecting about 15-20 to agree to 
meet, 5 or so to show interest, and 1-3 to show strong interest. Japan 
is an incredibly diverse market and there will always be someone 
covering your niche, if you look hard enough.

* Decision makers
Not unique to Japan but certainly very important here, is the need to 
approach distributor candidates at the right level. Seeing section 
chiefs ("buchos") and below often won't work, as these people are 
already overworked, and your product might represent even more burden. 
Therefore, as consultants we tend to aim high. After winnowing the 
prospect list down to a final 3-5, we will approach either the CEO or a 
director on the board (depending on how big the company is). Connecting 
to such people isn't easy, and typically we go in through introductions 
from banks and investment firms, ex-employees, and other firms in 
peripheral but non-conflicting sectors. You may have heard that 
high-level introductions are personal commitments by the introducer, and 
so they are not to be taken lightly. We always make sure we are very 
well prepared and not embarrass the introducer.

While working on the top people, we also try to insert a junior 
researcher into the target company at a lower level, and have them try 
to make some personal relationships and find out during informal bonding 
sessions (i.e., drinks at a local bar) who the senior decision-makers 
are, the gatekeepers, and the politics. We then combine this 
intelligence with a refinement of our message to the senior management 
of the firm.

This is a time-consuming process, but if done properly can be really 
effective, as you can strongly address fears and concerns of the top 
management in the target with information that is very specific to them.

A good place to start a distributor search is the 6 major trading 
companies ("Shosha") and their various subsidiaries. These are 
Mitsubishi, Mitsui, Sumitomo, Marubeni, Itochu, Toyota Tsusho, and 
Sojitzu. Per our software example, all of these trading companies have 
5-20 IT subsidiaries, and if you also count the IT subsidiaries of their 
many other business units, then some of these trading groups may include 
20 or more IT/software firms.

If you are successful recruiting one of the upstream IT units, then you 
will have a strong chance of scoring a business with the trading 
company's many subsidiaries as well. In the case of Mitsubishi, this 
could mean business with over 600 family companies alone. And for 
Mitsui, more than 400 firms.

Doing business with Shosha may sound like hitting the motherlode but 
they also come with a huge negative. Each group of trading companies is 
fiercely competitive, and if you do hook up with Mitsui, say, it is 
highly unlikely that Marubeni- or Mitsubishi-related firms will want to 
buy or resell your product (unless you're a game changer with no 
competitors). Instead, once your distributor's competitors see that you 
are making some headway, they are just as likely to make a beeline to 
your biggest home competitor and bring that firm into the Japanese 
market instead.

For this reason, lots of market entry consultants advise their clients 
to not deal with the Shosha, but instead try to find some neutral 
parties. In the IT sector this means one of the telco's, manufacturers 
like NEC and Fujitsu, or a listed independent firm that is still run by 
the founder.

...The information janitors/


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+++ NEWS

- November 5th becomes World Tsunami Day
- Counter-intelligence unit established ahead of schedule
- Toshiba to be hit with JPY7.37bn fine
- ATD-X stealth fighter test flight early 2016
- DBJ ties up with Hoshino on new turn-around fund

=> November 5th becomes World Tsunami Day

For those of us from a country with British traditions, November 5th 
will now be celebrated for two reasons: Guy Fawkes day and now Tsunami 
Day. The U.N. General Assembly passed a resolution to adopt the 5th in 
remembrance of a tsunami that hit Wakayama Prefecture in 1854. In that 
event, a local resident lit a series of signal fires that guided people 
to higher ground and saved many from drowning. Of course, here in Japan, 
November 5th is already named tsunami preparedness day in honor of the 
victims of the March 2011 Great East Japan Earthquake. ***Ed: There are 
125 other U.N. designated international days, including World Toilet 
Day... Hmmm...** (Source: TT commentary from asahi.com, Dec 05, 2015)


=> Counter-intelligence unit established ahead of schedule

The Paris, France terror attacks have prompted the Ministry of Defense 
and the National Police Agency to push forward their schedule of 
establishing a counter-intelligence unit to deal with terrorist attack 
threats. The new 40-person unit will research terrorist actions around 
the world and formulate/develop local capability to deal with such 
threats. Measures will include increased ports surveillance, protection 
of key facilities, and anti-terrorism training for the police. ***Ed: 
This is an unfortunate but probably necessary development given 
political events overseas. Still, despite trillions spent on U.S. 
surveillance and response, the attacks this week in San Bernadino caught 
authorities completely by surprise. One wonders if spending more money 
here in Japan will really help? Instead, it's more likely that the 
outcome will be worsened public freedoms - such as arbitrary detentions, 
paranoia about foreign travelers, and additional loss of privacy and 
human rights. We're already heading down this slippery slope with Abe's 
press-muzzling legislation passed earlier this year.** (Source: TT 
commentary from rt.com, Dec 4, 2015)


=> Toshiba to be hit with JPY7.37bn fine

The Securities and Exchange Surveillance Commission (SESC) will levy a 
national record fine of JPY7.37bn against Toshiba for its long-running 
accounting violations disclosed earlier this year. Toshiba 
window-dressed its profits over a seven-year period, recording JPY155bn 
more than they actually earned. ***Ed: A quick review of U.S. SEC fines 
for similar corporate misdoings shows that the the amount of the Toshiba 
fine is easily on a par with U.S. numbers. Looks like Toshiba is really 
getting the book thrown at them.** (Source: TT commentary from 
reuters.com, Dec 05, 2015)


=> ATD-X stealth fighter test flight early 2016

Japan's ATD-X "Shinshin" stealth fighter will apparently make its maiden 
test flight early next year, providing the nation with the expertise 
needed to go on and build its own next-generation fighters. The plane is 
being built by Mitsubishi Heavy, and development began after the U.S. 
Congress blocked export of F-22 aircraft in 2007. ***Ed: The Shinshin is 
not expected to enter into service until 2030, so in the meantime Japan 
is making do with "second-best" U.S. F-35 jets from Lockheed Martin. 
BTW, a little-known fact is that the 2011 tsunami destroyed 18 F-2 
fighters that were stationed in the area -- about 20% of the nation's 
entire attack fighter fleet! Excellent backstory to the F-35 gap filler 
situation here: http://bit.ly/1ONSjpp.** (Source: TT commentary from 
popsci.com, Dec 4, 2015)


=> DBJ ties up with Hoshino on new turn-around fund

In a public-private tie-up example that we will see a lot more of, the 
ambitious hotelier group Hoshino Resorts has announced a tie-up with the 
government's Development Bank of Japan (DBJ) to help invest in and turn 
around struggling hotels and inns among the nation's 42,000 
establishments. The two parties have created a fund of JPY2bn to 
kick-start the operation. ***Ed: Probably what is going on here is that 
Hoshino is one of the few capable hotelier firms targeting inbound 
foreigners, and the government wants to balance the stampede of foreign 
capital already buying up struggling hotels. The problem is that the 
JPY2bn fund is pathetically small compared with foreign hotel funds such 
as Fortress (US$2bn being invested here) and others.**  (Source: TT 
commentary from nikkei.com, Dec 3, 2015)


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



=> No events/announcements this week.


=> No corrections or feedback this week.



=> Wakkanai: City of Monuments, Hokkaido
Japan's northern most city

We boarded the Super Soya for a five-hour train ride from Sapporo to 
Wakkanai the northernmost city in Japan. For those of you who do not 
want to take the train, Wakkanai is served by ANA twice daily from 
Tokyo. I was amazed at how many cattle we saw during the last two hours 
of the trip. Later I learned that there are 26 different breeds of 
cattle in Hokkaido with the Soya Black beef from Wakkanai being one of 
the best in Japan. The population is slightly over 37,000 hardy people, 
who are very proud of their heritage and homeland. Their sister U.S. 
port is appropriately the port of Anchorage, Alaska.

Prior to our scheduled tour we walked to the local fish market and past 
some interesting looking restaurants. We were told that it is very hard 
to get reservations to these local Russian restaurants. Yoko, our guide, 
started off our tour by pointing out the city hall does not have air 
conditioning, because the highest temperature ever recorded for Wakkanai 
was 22 degrees. She also commented that all the street signs are in 
Japanese and Russian!


=> Tsuyu no Tenjinja Shrine, Osaka
Trace three different stories in one shrine

There are just too many elements to adore in Tsuyu no Tenjinja. From its 
location alone, one can see how strong Shinto culture is - even the 
skyscrapers and ferocious activity in Umeda can't outshine its 
existence. And with its impeccable and multi-faceted history, the shrine 
will never lose its worshipers. Tsuyu no Tenjinja is only two stops away 
from MyStays Sakaisuji-Honmachi - my accommodation in Osaka. So I came 
to the area effortlessly, not knowing what to expect.

Tsuyu no Tenjinja stands splendidly among the swarm of high-rise 
buildings. Although you can still hear the traffic from all entrances of 
the shrine, especially Umeda Station's cacophony, inside, Tsuyu no 
Tenjinja persists in peace. I began to roam about the shrine grounds, 
and gradually discovered more and more distinctive elements that make 
Tsuyu no Tenjinja a spot with one of the richest histories in Osaka.




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

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