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Competing in Japan.

A perspective on the current business climate, the obstacles that still exist for U.S. companies, and an agenda for succeeding in this market.

With new commitments to bring the bilateral trade imbalance between the U.S. and Japan under control, the second annual follow-up report to the Structural Impediments Initiative (SII) hammered out on July 30 reflects the complexity of the trade relationship.

Cognizant of this relationship, the American Chamber of Commerce in Japan (ACCJ) seeks daily to improve this often complex trade alliance by exchanging ideas and opinions while seeking resolution of issues affecting the bilateral relationship. It apprises its members of special problems they may confront in conducting business with Japan and, where possible, assists them in solving those problems. The ACCJ draws on its 40-plus years of experience, as well as the accumulated experience of the more than 2,100 businesspeople who are members and who represent industries and service organizations from across the business spectrum.

Through nine years of first-hand experience (over the past 23 years), to include my current position as Executive Director of the ACCJ, I have watched the developing relationship between these economic superpowers. My observations are based on both government and business experience as well as an extensive study, "Trade and Investment in Japan: The Current Environment," conducted by A.T. Kearney and the ACCJ.

Overall, the environment for foreign companies is improving, with many companies more than doubling trade with or investment in Japan from 1985 to 1990. Of course, the future of such a trend needs to take into consideration the health of the Japanese and global economies as well. In that regard, 1992 promises mixed results at best.

Furthermore, as Japanese companies continue to assert their financial and economic strength in other countries, it is becoming more important for U.S. firms to compete with them on their home turf and/or establish alliances in the U.S., Europe, and other countries. This strategic rationale for competing in Japan has broadened over the last several years and continues to be emphasized by those American companies choosing to divorce themselves from their Japanese partners.

The inability to better penetrate the Japanese market is caused by the following:

* The high cost of doing business in Japan caused by exorbitant land prices and the resulting impact on rents.

* Difficulties in locating and hiring qualified personnel in a labor market characterized by shortages, lifetime employment, and attitudes that discourage employment with foreign enterprises.

* General complexities of doing business in Japan, particularly with regard to understanding the intricate relationships driving business and government decisionmaking processes.

* Multi-tiered distribution systems characterized by exclusive trading relationships, cross-ownership with manufacturers, and high-cost physical distribution.

* Interlocking business and ownership relationships known as keiretsu, which tend to favor doing business within the keiretsu groups rather than with foreign or domestic outsiders, and related exclusionary business practices.

* Ministry policies and regulations lack transparency and often consist of administrative guidance to Japanese firms, thereby discriminating against foreign companies.

Barriers to Entry

High operating costs in Japan are a reflection of the excessive prices of real estate, especially in Tokyo. However, prices have plateaued and even declined recently, but they still represent a major impediment.

Historically, foreign firms operating in Japan have had a difficult time attracting Japanese workers, particularly top university graduates. However, due to gradual changes in the cultural attitudes and expectations of younger Japanese, more and more Japanese university graduates are deciding to work for a few of the larger and more identifiable U.S. companies.

Traditionally, keiretsu relationships have made it difficult for foreign firms to compete against Japanese companies and hindered further investment by American firms in certain industries. Interestingly, some American companies feel that keiretsu relationships do not strongly affect their business in Japan. This is especially true for those in joint ventures who often reap the benefits of their Japanese partners' "relationships."

Complaints concerning distribution tend to fall into one of three categories: inefficiencies due to the large number of small retail stores, a subsequent increase in the number of links in the distribution chain from manufacturer to consumer (and, therefore, higher costs), and outmoded, anti-competitive business practices which impede the entry of goods into the market. This complex system may also be limiting the number and type of goods available to the Japanese consumer and aids in maintaining artificially high retail prices.

Other restrictions include non-market pricing mechanisms, testing association guidelines and procedures (such as lengthy approval periods and product formula restrictions that inhibit the entry of new foreign products), and an intellectual property system that does not adequately protect foreign products in industries such as semiconductors, publishing/recording, and pharmaceuticals.

The net effect of these restrictions is often lower returns on investment in Japan than can be expected in other major industrialized countries. This is especially true for new foreign entrants who face firmly entrenched Japanese and other foreign competitors, as well as a bureaucratic system favoring these market "insiders."

In the early 1960s and 1970s, many American companies shipped products, paying scant attention to Japanese market needs and requirements, especially quality standards which often exceed norms outside of Japan. As a result, they encountered difficulties in finding distribution channels and/or sales outlets for their products. Although a majority of companies today are more aware of Japanese consumer needs and tastes, many perceive their inability to sufficiently modify products to suit this market as restricting their ability to compete in Japan. Partly as a result of these perceived deficiencies, more and more U.S. companies are localizing production in Japan in order to meet the special requirements of these customers. Similarly, the establishment of R&D facilities in Japan has increased in effort to conduct product modification and associated activities.

Key Success Factors

U.S. companies that have prospered in this market attribute success to the following key factors:

* Quality products and services. * Quality personnel. * Overall commitment to the Japanese market. * Company/product image or reputation. * Advanced technology/innovative products. * Strong partnerships with Japanese companies. * Local manufacturing or R&D, where applicable.

American "insiders" currently in Japan emphasize the need for quality products and services, a visible commitment to this market, a strong company or brand image, and the first-to-market benefits associated with advanced technology or innovative products. However, while these "insiders" tend to move toward greater company control in the form of 100% owned subsidiaries, U.S. corporate "outsiders" (yet to locate here) are focusing on partnerships with Japanese companies as the critical factor for success. The increasing popularity of these partnerships derive from the lack of knowledge of Japan, high costs, and the general complexities of the market, and are cited as reasons for their focus on competing via partnerships instead of through wholly owned operations.

Lingering Problems

Although opportunities have improved for both trade and investment for foreign companies over the last five years, problems do remain. Most formal legal and regulatory barriers are gone, but such measures ensured a protected home market while Japanese companies grew to world-class status. Unfortunately, the current relationship between the U.S. and Japan is marred by the lingering effects of this past protectionism as well as current targeting of selected industries through Japanese ministry policies and regulations which often lack transparency or consist of oral directions, interpretations, and administration guidance. Such activity influences perceptions, and thus decisionmaking, for U.S. businesses seeking to enter or expand operations in the market.

Japanese business practices and structural impediments, as well as structural limitations within the U.S., underlie a majority of the remaining obstacles foreign businesses face. That is not to say that progress has not been made.

Recent measures, such as the joint U.S.-Japan project to boost global exports of U.S. goods announced in May 1991 and recent statements from Japan's Ministry of Trade and Industry (MITI) pointing to a need to harmonize domestic business practices with international norms, bode well for the future (if such words can be translated into solid actions).

In conclusion, I would like to repeat that indicators point to the continued improvement in the environment for trade and investment in Japan, as global economic conditions improve. Accordingly, U.S. companies should be firmly encouraged to enter the Japanese market and should not let trade rhetoric be a deterrent.

Agenda for the 1990s

However, given that obstacles for foreign firms still exist, the American Chamber of Commerce in Japan proposes the following agenda for the rest of the 1990s. U.S. businesses should:

* Continue to evaluate entry into or expansion in the Japanese market. The market is more open than in the past, and efforts to free the economy from the harness of regulation will only make it stronger and more competitive. Therefore, delaying a decision to enter Japan now will only make the move more difficult and costly in the future. If as some predict, 1993 will see a consumer-driven recovery, one needs to be here as the race begins.

* Study, and implement, the product/market requirements for product innovation, quality, service, and maintenance support, and be willing to implement the necessary measures to comply with local market needs.

* New entrants should consider the advantages and disadvantages of independent entry compared to joint ventures, except where specific industry factors prevail or where overwhelming advantages of a joint venture apply.

There still remains a lot more to do by both the U.S. and Japan to ensure a successful bilateral relationship. The task is not an easy one, but it is a necessary one.

William R. Farrell is Executive Director of the American Chamber of Commerce in Japan (ACCJ). Among its activities, the ACCJ manages and coordinates the activities of over 2,100 members and associates, recommends and implements policy, and advises on business and political conditions in Japan.
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Title Annotation:Accessing the Japanese Market
Author:Farrell, William R.
Publication:Directors & Boards
Date:Sep 22, 1992
Previous Article:U.S.-Japan policy and commerce programs.
Next Article:Japanese management: a study in stagnation.

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