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Lessons learned in Japan.

Based on our journey to full acceptance in Japan, we would offer these three principles: Be There, Be Prudent, Be Patient.

Ever since Commodore Perry sailed his "black ships" uninvited into Edo Bay in 1853, the notion of penetrating the Japanese market has held an air of mystery and contention for most American companies.

Japan and America have more than discovered each other since then, but the mystery and the contention remain. Some of it is based in reality. Business customs and expectations are, indeed, different from those in the United States.

Speaking from personal and corporate experience, though, I think both the differences and the difficulties have been overstated to the point where some American companies are talking themselves out of lucrative opportunities in Japan -- the world's second-biggest market.

There is no guaranteed formula for success in any national market. In nearly 30 years of doing business in Japan, though, my company has thrived there. If I had to summarize the most important lessons we've learned about doing business in Japan, I would offer these three principles:

1. Be there. 2. Be prudent. 3. Be patient.

We've learned these lessons while building a market position in the famously competitive and politically sensitive semiconductor market -- a market second only to autos as a hotbed of trade disputes between the U.S. and Japan.

My company, Materials Research Corp., is a manufacturer's manufacturer for the semiconductor industry. We make sophisticated production systems and materials for semiconductor device manufacturers.

We are an American company headquartered in Orangeburg, N.Y., a suburb of New York City. That's where we do much of our R&D and a substantial portion of our manufacturing.

As we began to feel the pressures of global competition in the 1970s, we established manufacturing facilities in Europe. Until 1981, though, our business in Japan was conducted on an arm's-length basis through a Tokyo trading company.

Like many medium-sized American technology companies, we recognized the potential sales in the Japanese market. Yet, our growth there was slow because our understanding of the requirements of the Japanese semiconductor industry was limited, as was our visibility.

Then, in 1979, our chairman and founder went to Japan for a firsthand evaluation of the situation. Dr. Sheldon Weinig came back to New York with a prescription for our malaise in the Japanese market: "We've got to be there."

An Indispensable Presence

While we had no problem with the quality of the trading company's performance, it became clear then, and remains true today, that a U.S. company won't be taken seriously in Japan without a local presence. Having local presence is an asset in any overseas market. In Japan, however, it is indispensable.

So, we fulfilled the "be there" principle by establishing our own sales and service company in Japan: Nihon MRC.

Our Japanese trading company was surprised, perhaps even slightly wounded, by our decision. It interpreted this as a repudiation of its performance. Recognizing that now, more than ever, we still needed a guide in the Japanese market, we invited the trading company to take an equity interest in Nihon MRC.

It did, at a level of 20%, and we found that we were practicing the "be prudent" principle. The trading company was now our partner rather than our agent, and a local partner is a prudent investment in learning the market and customs firsthand.

Its help was invaluable in avoiding time-consuming mistakes as one of our senior managers, an American, set up our operations in Tokyo. It loaned us enough staff to get started. As we gained confidence and experience over the first few years, however, we gradually replaced all the loaned managers from our partner with locally recruited Japanese managers, and had a Japanese take over as president of Nihon MRC from the American who began the company.

Our experience in staffing mirrors the experience of most American companies in Japan and other countries. Local people should be in charge of the local operation, as they are in all of our Japanese operations today.

It's not that our Japanese customers resent Americans. In fact, having an American visitor from the home office is an asset when our Japanese staff people call on a customer. The customer is often flattered that the American has come such a long way to visit. By the same token, respect for the visitor will also make the customer reluctant to discuss problems. Those will be saved for the local Japanese management.

It sometimes surprises people to learn that Nihon MRC was financially successful from the start. Sales were clearly helped by the years we had put in as an exporter to Japan. Once we incorporated in Japan, our visibility and market acceptance were helped by the relationship with our former trading company.

As time went on and our presence grew, the trading company's equity was bought out by one of our major customers, Mitsubishi. That was an important milestone in our journey to full acceptance in Japan, but our boldest move in that direction came in 1983 when we made a crucial decision to establish a manufacturing plant in the prefecture of Oita, on Ryushu, Japan's "Silicon Island."

Surprising Help

This was at a time when trade tensions were hot. The official and unofficial barriers to capital-holding by foreigners in Japan had been well publicized. But we got help from a surprising source: the Japan Development Bank.

This is a government-sponsored bank and a pillar of Japan's vaunted industrial policy. To the outside observer, financing an American company's factory in Japan to compete in the Japanese market might seem like giving aid and comfort to the enemy.

That kind of distorts and magnifies the difficulties of doing business in Japan. As it happened, we won the JDB's support by more or less the same method a corporate borrower would negotiate major financing in the U.S.

We made our case and won the bank's confidence in MRC and in the factory we were proposing to build in Japan. Along the way, we got some worthwhile guidance from the U.S. Embassy in Tokyo and from Mike Mansfield, who was the U.S. ambassador at the time. In the end, however, we got the financing simply because the JDB felt MRC would make a meaningful contribution to the Japanese semiconductor industry -- and because the bank felt we were a worthy credit risk. With the bank's approval, MRC became the first American-based firm to receive JDB financing.

The process that led to that decision was far from simple. We went through a series of excruciatingly detailed meetings. The nature of these sessions underscored the importance of applying the "be patient" principle in dealing with the Japanese.

The Japanese approach to negotiating is very different from what we do in America. They use serial negotiation. Issues are negotiated one point at a time. Once a point is agreed to, it is a matter of honor that you don't come back to it again, even if a new point casts doubt on the logic of what you previously approved.

We compromised on that, and on the bankers' insistence that I personally guarantee the loan to MRC. I was told this was common in Japan, but they respected my explanation that it was unheard of in America and I couldn't do business that way.

While the negotiations were challenging, they increased my insights into the way Japan does business. And some of the insights left me very impressed.

'We Have a Deal'

I will never forget the moment when one of the bank representatives smiled at me and said, "We have a deal." There were no papers to sign. No competing battery of lawyers fighting down to the wire over clauses and sub-clauses. Instead, a simple, four-page document arrived in the mail a few weeks later.

Japan is not the litigious society that America has become, so you don't cover every possible eventuality when you negotiate an agreement. If the parties establish trust in each other, they trust that any misunderstandings can be worked out, and they usually are.

With that model to work from, I would hope that the bigger policy differences between Japan and the U.S. won't prove intractable. Trade tensions not withstanding, there are many thriving American companies already in Japan -- and the potential for many more.

Garrett E. Pierce is President and Chief Executive Officer of Materials Research Corp., a world-leading manufacturer and supplier of production equipment and high-purity metals for the semiconductor, telecommunications, and media storage industries. He joined the Orangeburg, N.Y.-based company in 1980 as Vice President and Chief Financial Officer.
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Title Annotation:Accessing the Japanese Market
Author:Pierce, Garrett E.
Publication:Directors & Boards
Date:Sep 22, 1992
Words:1439
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