Why Today Is The Right Time To Tackle Japan
Published in the Puget Sound Business Journal
Should my company be doing business in Japan? This is a question on the minds of many CEO's and CFO's here in the Pacific Northwest, and the prevailing sentiment seems to be a deep-seated pessimism. It's easy to understand why; the stubbornly entrenched, time consuming and expensive Japanese ways of doing things, coupled with a pernicious recession, have discouraged many small to mid-sized enterprises from making the effort. And for good reason: change doesn't come easily to a country where business practices are woven so deeply into the social and cultural fabric. But in my view business can and should be conducted in Japan—today—without waiting for some magical "change" to occur.
The irrefutable truth is that Japan is the world's largest economy outside the US. Even with its serious economic problems it still remains by far the largest market. If you look at the following chart one would think Japan would be the first international target of any company.
So why is there any question at all as to whether a company should be selling there? To answer this question we need to look more closely at the age-old problem of why many companies find it difficult to get their fair share of this huge market.
Since trade began with Japan over a century ago, exports from Japan have exceeded imports. Companies have found Japan to be a frustrating place in which to do business. Inevitably, it seems, their business results are far less that the effort expended. These results are particularly disappointing relative to the return-on-effort doing business in other leading world economies.
These problems have been in existence in both good and bad economic times. It is not the current economic downturn that is their root cause; it is something more systemic. And, if these systemic problems were eliminated, or at least reduced, the positive effect on Japanese imports would be far greater than a simple correction in the stagnated economy.
Why am I so confident of this? The simplest explanation comes from an analysis of a few key pieces of data.
First, let us agree that doing business in any foreign country is going to require understanding that country. One very good measure of how well a country is understood is to measure the amount of foreign direct investment flowing into it. FDI requires understanding; therefore measuring FDI provides an excellent quantifiable measure of understanding.
When the US is examined in this light, we find that it generates 29% of the world's GDP, it makes 30% of the world's FDI, and it receives 36% of the world's FDI. A well balanced situation with a slight favor to inbound investment that indicates that the world understands US business and that it is an easy place to do business. But when we examine Japan we find a very large imbalance in FDI. Japan generates 13 percent of the world's GDP, does in fact make 13 percent of the world's FDI, but only gets 0.8 (zero point eight) percent of the world's FDI in return. This very low level of FDI is a clear measure that the world does not find Japan an easy place to do business.
Whatever its internal economic conditions, Japan's FDI inbound percentage remains very low in comparison to the rest of the world. Yet, over the last decade these ratios have improved and it is easier to invest in Japan today than a decade ago.
Returning to the idea that FDI is a measure of understanding business in a country, we can see that while Japan's understanding of the world is on target, the world's understanding of Japan is off by a factor of 16 to 1 in the wrong direction. Now if we could get a clue on the reasons behind this FDI problem (instead of focusing on the current recession, which is small in comparison), we would have a reasonable chance of evaluating ROI in a Japanese business operation.
The inescapable conclusion is that, as far as its impact on foreign companies doing business in Japan, this recession is way overplayed. The underlying problems have little or nothing to do with recession. Under any circumstances it's a hellaciously complicated place to do business. That's true when its economy is roaring, and when it's in recession. And that 's the thing that needs to be overcome.
Briefly stated, there are two main issues: Regulations, and Distribution. Let me cite one example of the tangle of regulations a company must deal with in Japan. When a new company is starting business it must register with the appropriate agencies in order to give social benefits to its employees. When we measured the direct costs of going through the registration process we found the costs 16 times higher in Japan than in the state of Washington. Although there is a lot of talk about deregulation, the changes are very slow in coming. But, they are coming and it's easier today to invest in Japan, to set up a business in Japan, than it was 10 years ago.
The problems (and possible solutions) to the problems of distribution are an article in and of themselves. The basic problem stems from a society where relationships are very important and result in companies buying from distributors of long standing. Suffice it to say that in most product areas solutions exist and changes are occurring. The key is understanding what can be done and at what cost.
The bottom line is this: it's a huge economy, with a tremendous upside for those willing to develop the necessary understanding and to make the necessary effort. As dismally as the Japanese economy has performed over the past few years, its GDP is still larger than the GDP of Germany and France combined; almost three times that of the UK. Now is the right time to begin addressing the real obstacles to trade... before your competitors do. Trade follows investment, not the other way around.
Japan is a very unique place. But that uniqueness should not become an excuse for becoming "frozen" and staying away—it is the reason to get directly involved. That involvement will bring understanding and that will bring good business. The more directly you can work with, get involved with, and come to know your customers, the more quickly you will learn what you need to learn to succeed in Japan.
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