Business In Japan

a Guide To Japanese Business Practice And Procedure-- Fully Revised Edition

Paul Norbury

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429724176
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book covers the main practical elements of doing business with the Japanese. It gives the reader sufficient background to understand and associate with the Japan of the 1980s as well as support him with the know-how for searching out and grasping the rich opportunities that lie ahead.

Section III
Approaches to the Market

5
Working With Japan’s Free Market Structure

GENE GREGORY

From since about 1976, the din of complaints from the United States and Europe about Japanese trading practices has grown steadily, and parallels the mounting Japanese balance of payments surpluses, the decline of the dollar and periodic upswings in unemployment that characterise the same period. The prevailing view is that all are linked, and the root problem is overly aggressive Japanese export promotions combined with protectionist measures which exclude foreign products from the burgeoning Japanese market. If the Japanese would only promote their exports less and open their doors wider to foreign imports, it is argued, all these difficulties would be more readily resolved.

On closer scrutiny, however, this perception proves illusory. If the view of Japanese trade practices is reasonably accurate for the 1950s and 1960s, when the economy was being rebuilt after almost total destruction during World War II, it does not reflect today’s reality. Japanese trade and industrial policies put much less emphasis on export promotions and import restrictions, and devote much more attention to encouragement of imports along with adjustment assistance for Japanese industries no longer able to compete in markets at home or abroad.

Indeed, the central fact about the japanese market is that imports of manufactures are growing both absolutely and as a share of total Japanese purchases abroad. Yet, remarkably, the United States, and to a lesser extent Western Europe, have lost some of their market share as suppliers of manufactured imports to Japan during the 1970s. In almost every category of manufactured goods, not just textiles, but also such sophisticated products as chemicals and machinery, market share has been lost to the industrial newcomers of East and South-East Asia.

The problem, then, is not that the Japanese market is closed to imports of foreign manufactured products; rather, it is that advanced industrial countries as a whole, and the United States especially, are losing market share due to declining competitive power. This basic pattern is not confined to Japan, of course. It is a worldwide phenomenon and the main causes are likely to be common to all markets. Alleged trade barriers in Japan most certainly do not provide a satisfactory explanation. It is the market mechanism, not its distortions, that challenges western enterprise in the Japanese market.

Common wisdom has it, for example, that the Japanese distribution system conspires, intentionally or not, to discriminate against foreign imported products. Apparent upon the most elementary examination, the fact that a number of U.S. and European firms hold major market positions in a wide variety of products would, in itself, seem to offer sufficient evidence that the distribution system in Japan, whatever its weaknesses, can be made to serve imports as well as it does local manufactures.

It is worth noting, after a more careful look, that this same distribution system has quite effectively been used to introduce South-East Asian manufactured products in direct competition with Japanese industries that are generally protected in most other advanced industrial countries.

‘Calling the Japanese distribution system, which is a different way of doing business, a non-tariff barrier only confuses the issue,’ Dr. H.F. Jung, president of Bayer Japan Ltd., says. ‘The distribution system which has evolved in Japan over the years has its function in Japanese society. If a foreign businessman thinks he has a better distribution system he is free to prove that by setting it up and doing business successfully his way in Japan. Coca-Cola is a good example of that.’

Far from being a rigid structure which leaves the foreign firm no room for manoeuvre or innovation, as some critics claim, the Japanese distribution system is essentially dynamic, in a constant state of flux. To be sure, some sectors of the system are more flexible and dynamic than others. But, in general, the foreign exporter or investor finds that his options in the Japanese market are not dissimilar to those in other advanced industrial countries. The problem is to identify and understand those options, and this may take more time, effort and patience at the outset, simply because a new entrant into the Japanese market usually has less relevant experience than it does in other markets. Moreover, most foreign firms do not make the first and most important investment in language training for their managers, to equip them with the elementary tools for understanding and mastering the Japanese distribution system. Those who make this investment, however, are generally largely rewarded.

Olivetti is a case in point. Over the past 18 years, presidents of Olivetti Japan, equipped with a substantial working ability in Japanese, have developed a network designed to the company’s special needs. Portable typewriters, once sold through the traditional office machinery wholesale channels, were switched to Olivetti’s own direct-to-the-retailer sales organisation. Olivetti now has a comfortable 40 per cent of the portable typewriter market, which it gained against strong competition from Japanese manufacturers.

Direct sale to the retailer is also one of the main factors in the success of Estée Lauder’s penetration of the men’s cosmetics market. The company took charge of product distribution, from arrival in its Yokohama warehouses through to selling at its own retail counters strategically located in the men’s department of major department stores. In so doing, it cut distribution costs far below those of its major competitors. As a result, Estée Lauder now boasts approximately 45–50 per cent of the total men’s cosmetics business in department stores throughout Japan.

Taking a somewhat different route, Nihon Philips and Melitta both introduced coffee-makers into the Japanese market using coffee bean wholesalers and retailers rather than appliance channels that are largely controlled by Japanese makers. Practically speaking, the competition has been limited between the two European manufacturers. Although some Japanese appliance-makers have since introduced electric coffee-makers, neither retailers nor the consumers have so far taken them very seriously.

If such innovation in distribution is possible in Japan, however, this does not mean that existing channels are either closed or useless to foreign exporters. Nestlé has captured and held approximately 75 per cent of the instant coffee market (which accounts for 80 per cent of all consumer coffee sales) using the traditional wholesale network. Lipton’s has become a household word in Japan synonymous with black tea, marketing its products through a joint venture with Mitsui and Co. and Toshoku, a major tea wholesaler.

Similarly, Johnson & Johnson has consolidated its position as a leading supplier of health-care products by working through the complicated existing distribution system. According to Kneale H. Ashwell, current president of Johnson & Johnson K.K., ‘we sell none of our products directly. Instead, we sell through wholesalers, and sometimes through two or three different levels of wholesalers. In my opinion, Japanese wholesalers perform certain invaluable functions, such as pre-pricing, physical distribution, carrying credit risks, and so forth. What is needed is not to eliminate wholesalers, but to establish a more balanced relationship which allows us more interface with consumers.’

Under the guidance of its general agent, Chuo Bussan, Tampax, Inc. also sells its products through existing wholesale channels and is now the leading brand with a 30 per cent market share. Tampax has demonstrated, moreover, that the foreign firm is by no means at the mercy of established channels. To prevent the sale of its products at cut-rate prices, Tampax allows its wholesalers only a 5 per cent margin. But because of customer loyalty, assured through mass advertising and promotions, Tampax can exercise as much influence over its distribution channels as a major Japanese manufacturer.

Some foreign firms have found that the best channel into the market is through the distribution networks of Japanese manufacturers, who may or may not use existing wholesale channels. Pez, the Viennese maker of peppermints, packaged imaginatively to appeal to young people, successfully gained a position in the Japanese market through Morinaga, a leading confectionery company. Sony distributes Whirlpool appliances and Dutch-made Bruynzeel kitchen cabinets through its domestic trading company, while another Sony subsidiary, Sony Plaza Co., operates a chain of nine retail stores specialising in imported houseware, toiletries and sundries.

But Sony is not the only major Japanese exporter to turn its marketing energies to importing foreign products. Toyota’s import arm, Toyoda Tsusho Kaisha Ltd., was founded as early as 1948, although it began to develop diversified trading in imported products only in the 1970s. With the same enthusiasm that has won it markets at home and abroad for motorcycles and cars, Honda has established four wholly-owned subsidiaris and one joint venture company in a serious bid for the growing Japanese market for foreign products.

Matsushita, which has gone about its import business methodically and rationally, offers distribution facilities for a vast array of foreign consumer durables, parts and components, raw materials, machines and measuring instruments. Two subsidiaries, Matsubo Electronic Instrument Sales Co. and Matsubo Electronic Components Sales Co., distribute these products, while two other subsidiaries market juke boxes, automatic ice-makers, washers and dryers, catering equipment and related products. Still another member of the Matsushita group sells products such as office-cleaning equipment to the service industry and consumer products to intermediaries for distribution.

The problem confronting foreign firms doing business in Japan is quite clearly not the lack of distribution channels; nor does the foreign marketer suffer any special competitive disadvantage inherent in the system itself. In general, the difficulties are of a much more subtle kind and derive directly from the foreign company’s approach to the market.

Assuming that foreign companies have special products and services that are superior in quality or price, they will succeed in the long run only if they make a serious effort to market their products in Japan. If this seems an excessively obvious statement, it should be noted that many agents of foreign companies and their branch offices in japan are wholly frustrated simply because the home office refuses to take basic differences in the Japanese market seriously.

Johnson & Johnson believe that it is very important to spend a lot of time and money in order to determine clearly what market segment to sell in. ‘Product specialisation and concentration, rather than a broad, shotgun approach, are necessary in Japan.’ And, since new product lift-off and payoff periods are longer than in the United States or Europe, ‘patience, guts, and determination are required’.

As both Philips and Braun have learned, products often must be redesigned to Japanese specifications before they can be sold successfully. Both companies have reduced the size of their electric shavers to fit the smaller hands of Japanese users, and are now the market leaders.

Japanese consumers have an extraordinarily high sense of quality. ‘As a result,’ states Cornells Bossers, president of Philips Industrial Development and Consultant Co. Ltd., ‘the intense competition among manufacturers in Japan is such that only the best products will be able to maintain any kind of market share. Japanese consumers demand that products be flawless from the beginning. In Europe, for example, customers take for granted that about 3 per cent of all products will be slightly defective, and these will simply be serviced. In Japan, 97 per cent perfection is not good enough.’ After-sales service is broader and more personal in Japan than in most countries: since such service tends to be costly, Japanese manufacturers find it cheaper to assure high quality standards to avoid after-sales service as much as possible.

Still, even after a foreign firm makes the necessary product adaptations and meets the high quality standards of Japanese consumers, there is a variety of problems that must be squarely faced.

Japanese firms tend to produce to very tight delivery schedules, for example. Also, since Japanese department stores do not maintain inventories, suppliers must have facilities near-by to ensure ready and steady supply, often making deliveries on a daily basis. Similarly, component and materials suppliers must maintain an inventory to assure the original equipment manufacturers or processors of regular deliveries to relieve the customer from the necessity of carrying the inventory himself.

Furthermore, if components and materials do not meet the users’ tight specifications, they are returned, at the suppliers’ expense and often with penalties imposed. Likewise, department stores usually reserve the right to return unsold merchandise and may impose penalties on suppliers for occupying their limited space with slow-moving items.

Obviously, not every foreign company is financially or technologically prepared to make or even interested in making the kind of effort these stringent practices require. The problem is not that the market discriminates against imported goods. On the contrary, in many instances there is a clear consumer preference for foreign products. But to meet that demand is often too expensive for the foreign exporter. There is, therefore, a strong temptation, to which many foreign firms have yielded, to try to enter Japan on the cheap. Products are assigned to a trading house or a distributor, prices are fixed to assure maximum short-term return, and the market is monitored by occasional visits from the home office.

This approach, however successful it may seem at the outset, is almost certain to end in disappointment. Either the low investment and high prices restrict the market for the product; or if the product has some advantage and can command a high price and high margins for both the exporter and the Japanese distributor, as the market widens it is certain to attract the interest of local competitors.

At this point, some critical decisions must be made. Either prices must be lowered sufficiently to discourage competitive entry, or the foreign firm must make a defensive investment in Japanese production to save and expand market share. Because the foreign exporter is much further from the market than the Japanese manufacturer, there is usually a lag in response to any crucial changes in Japan’s competitive environment. The results can be disastrous. Foreign companies frequently introduce a product to the Japanese market and gain a substantial market share, sometimes from 80 to 100 per cent, only to see their position crumble suddenly before emergent Japanese competition.

The problem here is clearly not prejudice or discrimination against foreign i...