International Trade/Offshore Manufacturing/Sourcing/Export/Import/Consulting Is Now the Time To Explore Japan By Roger Kass Doing business in Japan is the same as doing business anywhere else in the world - only different. In Japan, each person and company operates an extensive network of jinmyaku (connections). The most formal of the jinmyaku are the old Zaibatsu grouping, such as the Mitsubishi, Mitsui and Sumitomo groups. While today the jinmyaku are made-up of independent companies, they are often closely linked through cross-share holdings, information networks and history. When it is commercially or politically advantageous, the individual companies may present themselves as part of a large group while, at the same time, if it suits their needs, they may deny any knowledge of the activities of the other companies within their group. The Japanese practice of moving staff every two or three years means the staff continually extends their personal and company network. On the other hand, it also means that agents and suppliers must not invest too much in any one personal relationship. To ensure ongoing business relations, it is important that good connections extend throughout a customer's organization and not be merely with one or two individuals. Japanese companies are acutely aware of power relationships and will try to prevent one supplier from getting into a dominant position. This situation can often be exploited as an effective entry strategy in a market with a limited number of suppliers. However, it can also effectively limit the market share available to any one supplier. Situations where a supplier attempts to unduly influence a company employee or situations where the employee is asked to put his own interests ahead of the interests of the company are dangerous. Unfortunately, this is not an entirely uncommon situation, especially in periods of uncertainty, such as the restructuring phase many Japanese companies are currently undergoing. Such is the scrutiny of everyone's actions that even under normal conditions it is difficult for special arrangements not to be suspected. It is best to avoid any attempt to gain a competitive advantage by trying to unduly influence an employee. There are a number of widespread purchasing customs practiced by buyers in Japan and a number of myths. To introduce a product that is new to the Japanese market, or even to sell an existing product from a new production site to the Japanese market, a supplier will need to address many, if not all of these issues. Pressure to reduce prices as a result of exchange rate fluctuations. When the yen appreciates, many companies that had priced their products in Japanese yen on the insistence of their customers are frequently asked to reduce their prices. This occurs despite the fact that previously the seller had been taking the exchange rate risk. On the other side of the coin, when the product is quoted in U.S. dollars and the value of the U.S. dollar appreciates against the yen, customers often require suppliers to adjust their prices. Therefore, carefully evaluate the risks and rewards, as well as the competitive situation, when deciding on which currency to use and when setting the initial price level for new products in the Japanese market. In any market, raising prices once an initial price is established is difficult. This is especially true in Japanese markets. Expectations of lower price. Japanese buyers frequently demand significantly lower prices for imported products, simply because you are still a newcomer in the market. Although your company is committed to providing long-term, stable supplies, customers will compare your price to other foreign producers and, wherever possible, to the prices from domestic suppliers. They will then demand or at least expect a lower price as a kind of payment for market entry. This can sometimes be a tempting strategy to gain market entry. However, keep in mind that raising prices in the future will be difficult. By accepting a lower price, you have demonstrated you are willing and able to do business at this price level. Be selective in deciding to which company, if any, you will offer an introductory or discounted price. Be certain the request for the lower price is for real business and that the buyer is not going to use your lower price just to try to get a lower price from his current suppliers. Often, a buyer will request a lower or special price to see how serious or desperate you are. Another reason for demanding a lower price is to determine how much authority you have in negotiating prices. It is important to satisfy yourself that the buyer is serious and that you have valid marketing reasons for agreeing to a lower price. Do not agree to a lower price hoping it will lead to new business. If you want to offer a lower introductory price to establish a presence in a new market, be sure the customer understands and agrees with your objectives. You will also want to be sure the selected customer will meet your needs as a credible and willing reference. You will want to know that in exchange for the special price, the company will permit you to use their name as a buyer. You also want to be sure they will not discuss the lower price you have offered with other potential buyers. Excessive requests on quality and specifications. Excess quality requests often appear to be unrelated to product performance. Customers tend to scrutinize imported products more carefully than domestic products. Often, if the product is different from a domestically produced one, it is unacceptable, regardless of performance or suitability for a particular application. These excessive quality requests are frequently different or unrelated to internationally recognized standards and specifications. Opaque procurement practices. Corporate procurement practices in Japan are not always open. They tend to be directed to current business relations. Therefore, foreign (or new) suppliers are disadvantaged in gaining access to new opportunities. Small lot orders and just-in-time deliveries. To meet short lead time and customer requirements for small orders, suppliers are often forced to maintain excessive in-country inventories for regular, repeat orders. When customers change specifications or terminate production of that line, such inventories can quickly become dead stock. This is where a good agent or distributor can be a helpful partner. Post-transaction price adjustment system. Japanese manufacturers frequently provide post-transaction price adjustments to local merchants. This is referred to as tatene and creates the potential for local producers to exercise leverage and control over local merchants in a way that limits market access for foreign producers. Although the tatene system is illegal and most major manufacturers are trying to abolish it, it is still practiced in select cases and markets. Corporate racketeering. There have been several stories in the newspapers recently about the Japanese corporate racketeers (sokaiya). This is the result of the pretense that most Japanese companies are models of rectitude and managerial competence. Consequently, these Japanese corporations become easy targets for extortion by the corporate racketeers. The sokaiya use the company's annual general meeting as the public platform, at which they threaten to air the companies dirty linen. Condoning the activities of the sokaiya, by paying them off, is against the law and is resulting in an increasing number of prosecutions by the Japanese government. Since most Japanese companies have the same mentality and the same skeletons in their closets, the lack of threats from the sokaiya and the lack of fear of government prosecution are the few advantages that foreign companies enjoy in Japan. A fundamental principle of doing business anywhere is that if you don't like the people don't bother trying to sell to them. This can be especially true in Asia where personal relations are so important to business. Some foreigners are uncomfortable with the Japanese; this includes a number of Asians and a number of Americans and Europeans. Body language is a giveaway and it only takes a few minutes for an astute executive to realize that he is dealing with someone who is uncomfortable. Doing business in Japan can be fun, challenging and rewarding, both personally and financially. If you, as an individual, and your company can satisfy the demands of your demanding Japanese customers, it will improve your performance in other markets, both at home and abroad. Best Prospects. The best prospects for U.S. exporters of products and services, including agricultural products, are: 1. Electronic components 2. Computers/peripherals 3. Computer software 4. Pharmaceuticals 5. Medical equipment 6. Travel and tourism 7. Aircraft and parts 8. Automobiles 9. Building materials 10. Pumps, valves/compressors This article was first published in 1999. Roger Kass was president of KNG Marketing Services Inc. in Atlanta. He has spent close to 30 years in international marketing. KNG Marketing Services specializes in international business-to business markets, providing strategic market entry strategies, international business planning, market research and international business etiquette. Advertise on this site Put your company on this site!