The Driver's Seat: A Show of Commitment

By Terrie Lloyd

Communication with a Japanese distributor is vital to getting the most out of your business.

Your company has hired the consultants, done the trade show, and has subsequently found a distributor with whom to start doing business in Japan. For some, this is the end of the story in terms of their direct involvement in Japan, and they are happy to take a smaller cut of the sales and leave the distributor to execute every aspect of the Japan operation. In a company that sells intellectual property versus products, this type of relationship is common, and handing the work of market development to your Japanese partner will mean that you can typically expect to receive just 25 percent or so of the revenues. If you’re selling products, then you might receive 40 percent to 50 percent.

To receive more of the cut, you need to be ready to put more effort in and to get involved in the development of your Japanese market. As well, getting involved in the market entry process will mean that the business relationship with your distributor will be healthier. In my experience, most distributor relationships that involve little or no involvement by the exporting firm eventually atrophy and die. There are many reasons, but the biggest are: 1) the distribution partner loses interest and diverts their resources to other projects, 2) they get approached by a more eager competitor and wooed away from you, or 3) they get possessive/ greedy, feeling that since you’re putting so little into the business, why should you be getting even 25 percent?

Indeed, the Japanese business landscape is littered with distribution deals that failed through lack of communication and sense of common purpose between both parties. This is simple human nature at work, especially since face-to-face relationships are so important to the Japanese. To have success, you need to manage the new partnership at closer quarters and stick to the principle that “you get out what you put in.”

Therefore, my recommendation is that after establishing the fact that there really is a market for your products in Japan, as soon as the sales start to show some acceleration, you need to establish a small office to provide both marketing and technical support to the distributor. By small, we’re talking possibly just one person—a retained part-time in-country representative who will help with communication with the distributor and show up for some of the initial customer meetings. These types of people are available as consultants and can be found through the JETRO website.

"the best size of office is one that supports all the brand building, localization and troubleshooting aspects needed for a successful market presence."Although paying for just one person sounds attractive, the best size of office is one that supports all the brand building, localization and troubleshooting aspects needed for a successful market presence. Building your own independent public image in Japan will be especially helpful if, in the future, you have a falling out with the distributor, or, if the business goes so well that you want to gain complete control over it. Thus, at an early stage, the distributor must realize that this is your product and they work for you—so you have to establish that ownership by directly handling the brand and the support.

Therefore, the minimum size representative office is going to consist of four people: a CEO, a general office assistant, one technical support person, and one sales/marketing/PR person. Your CEO will be doubling as the Biz Dev person in this operation. The cost of running an office of this size is not insignificant, being around 5 million yen ($46,700) a month to operate, but the benefits as your business grows will make up for the investment. My rule of thumb on companies that maintain their own presence and control of a distributor relationship is that it adds about 15 percent to the cut that can be taken on revenues earned. This means that at approximately 300 to 400 million yen of annual revenue, your office is paying for itself.

What will these four people be doing? The marketing will consist mainly of PR efforts, some small industry-specific advertising and trade shows—and is important to ensure your company’s brand grows alongside the distributor’s efforts. At the same time, and particularly in the early stages, your CEO will be getting involved in some sales prospecting, so as to help reassure the distributor that the market is there and get them excited about their prospects.

On the technical support side, most of the work revolves around localization and regulatory issues, taking requests for improvements and features, and perhaps most importantly, being available to meet with customers who are having problems and want to see some local commitment. Nothing beats a foreign firm showing up with a strong locally-based technology person when the going gets tough. JI