Episode #159: Running A Foreign Business In Japan

Running your own business is challenging anywhere, but Japan adds a bit of spice to the broth. According to official statistics, 70% of Japanese companies are unprofitable. Business seems pretty simple at one level – constantly seek to increase revenues and reduce or hold down costs. To increase revenues you can find more customers, more repeater customers and raise prices.

Raising prices in Japan gets tough, when you are in the churning wash of decades of deflation and when there are always lots and lots of competitors. When the consumption tax was raised previously, the economy immediately plunged into recession, which indicates the price sensitivity of the populace. The Abe Cabinet blinked and gave up on the last scheduled increase out of fear of the consequences.

The usual way of differentiating yourself and justifying higher prices is through the added value you provide. Naturally, there is a major sales and marketing effort required to get that value message out. Both options in Japan however come with high price tags.

By the way, whenever we do training as part of a global arrangement, we always get push back on the pricing in Japan, especially when the yen is converted to other currencies. Abenomics is not helping much at the moment, with the rapid strengthening of the yen.

Why overseas head office staff would imagine that pricing here should be the same as at home is a mystery, but that is often the expectation. The cost structures here in Tokyo for wages and rents are high relative to other countries and the prices reflect that. Downtown Tokyo office space rents per square meter, in a reasonable location, will fall in the JPY9000 – JPY 14,000 range (USD$90-USD$140).

I refer these global partners back to their own local operation’s wage and rent bills in Tokyo. I point out these are nothing like what they are costing at home, so why expect global pricing to be uniform? In general, fixed costs as a percentage of revenue are high in Tokyo and it is a struggle to get them down.

Unlike other Western countries, where salespeople are prepared to work on a 100% commission basis, very few Japanese staff are attracted by that option. Again this opportunity to move wage costs away from fixed to variable is less available here. This means there must be a base salary plus bonus or commission arrangement and the base will be relatively high. Especially if you are a foreign operation, as you need to attract potential employees. When were a start-up in 2007, we had to pay our sales staff close to double the norm, to get them to work for us. By the way, add another 15% to you wages bill for all the various social insurance and pension costs.

Of course, if you are a prestigious mega corporation, encapsulated by a powerful brand, this attracting staff challenge may not be such an issue. If you are a Small Medium Enterprise (SME) then attracting people becomes more competitive. If your team needs to speak some reasonable level of English, then the wage bill goes up immediately. As an illustration, a competent English speaking PA in Tokyo would earn around JPY7m-JPY 8m (USD$70k-USD$80k) per annum.

There is also a limited supply of Japanese who want to work in an international environment and that number is declining rapidly, as less and less young people go overseas to study. We are currently in the midst of a real turning point regarding the internationalisation of the younger generation. The young don’t want to learn English and they don’t want to live overseas, because everything is so wonderful here in Japan and it is safe. They are going to become almost impossible to hire for SMEs, as we are simply outbid by bigger companies.

Marketing in Japan, especially in Tokyo is a remorseless pit into which you have to throw lots of money. Print ads and content marketing driven advertorial are very expensive here and the publishers have plenty of Japanese companies able and willing to pay, so trying to cut a deal is fraught.

Television predominates with 15 second ads, so even if you can afford the big money involved, your appeal to buyers in that time is microscopic. On-line banner ads are not inexpensive. Pay per click keyword search ads and Facebook ads are also not cheap and can burn through cash at an alarming rate. Few Japanese are using LinkedIn as yet, so it mainly targeting a foreign audience at this point. PR is a viable option for brand awareness, but you get what you pay for. SMEs can rarely pony up the type of money required to get the PR agency’s “A Team”, so don’t expect magic from the “D Team”.

Japanese websites are often the complete antithesis of the Zen like western approach. Garish colours and packed screen real estate are very common here. So what do you do, go Zen or go Garish? Do you have the cash to pay for a Japanese language copywriter or do you do it internally to save money? Are your team members any good at it? Your SEO has to be fined tuned to push yourself forward in the page rankings and you need people who know what they are doing, as DIY is cheaper, but a lot harder. These resources may be in-house or on contract, but they still push up the wage’s bill.

Networking in Japan is different to Western countries in that few Japanese go to these events all that willing to meet new people. Sound promising? The meeting charges are also expensive as well (USD$50-USD$80), so if your team are really getting out there, the costs can be significant for what is really a shotgun marketing effort. It sounds crazy, but the usual style is that someone you know introduces you to someone they know. This is acceptable, if quite limited in scope. Bounding up to complete strangers and introducing yourself is possible, but the reactions are often mild shock, blank stares and some resistance. This negative response is applied to Japanese as well as foreign staff. “Working the room” hasn’t quite made it here yet as a concept.

Cold, as opposed to warm approaches are also tricky. Sending a direct mail piece to someone unknown goes straight in the bin. Any email from an unknown entity similarly gets deleted unread. You can cold call here but you really need to know the person’s name. If you don’t, you will get blocked at the entry point, promised that your message will get passed on and a return call offered – if they are interested. You will never hear back from them.

There is always the issue of it may work overseas but it won’t work here. If you bring global statistics, then there better be a Japanese component of the survey or the whole thing is just dismissed as irrelevant. That means you have to pay to run the same survey here, to show the significance of your findings for the Japanese market. This costs money. Testimonials from overseas companies, super brands or otherwise, are also invalid by definition. You need a local track record to be credible and skepticism reigns without relief.

Natural disasters, especially earthquakes are a constant prospect and all of us living in Tokyo know we are overdue for “The Big One”. After the triple whammy of earthquake, tsunami, and nuclear core meltdown in Fukushima a few years ago, our training business ground to a halt with four months of no cash flow. Who wants to do training, when you are having large numbers of major aftershocks every single day for months. We all know it is important, but it is at moments like these, we really understand the importance of cash flow in a business.

The good news is that you do get paid by clients. Also, Japanese companies prefer the devil they know, so if you supply value, then you can expect repeat business. Staff are hardworking and diligent. People are honest, neat, polite and things work here, also there is fantastic infrastructure. There are large numbers of foreign corporates with businesses here, who are more open than a lot of domestic companies to your approach. There are English language magazines aimed at these expatriate leaders, which because of the limited market, cost a fraction of the Japanese mainstream media. There are many foreign Chambers of Commerce, business associations and study groups here, so there are many networking opportunities where you can actually “work the room”.

The rule of law applies here and legal disputes that have to go to court are few and far between. Like anywhere, there are criminal gangs (yakuza) extorting businesses, but they tend to leave foreigners alone and prefer exploiting the locals, as it is a lot easier.

Because of Japan’s extremely strict immigration and refugee policies, there are very few ethnic or religious groups who are likely to cause Japan much trouble. The biggest non-Japanese ethnic group are Koreans. The majority were born here after the war, their grandparents being brought in during the war years as forced labour. There are some foreigners here illegally overstaying their visas, but they are keeping a very low profile, because the Japanese government deports them once found.

Japan is still the third largest economy in the world. The main leisure activities here really, for the majority of the populace, is to shop and eat. Many foreign companies have done well here, they have found the formula for success but few have done that rapidly. Long-term planning, patience, grit and sustainability take on different dimensions here in Japan.