Article: Direct Sales Entry Strategies in Japan

Article written by Philippe Huysveld, CEO & Senior Consultant, GBMC (Global Business & Management Consulting)

“Entering a new country-market is very much like a start-up situation, with no sales, no marketing infrastructure in place, and little or no knowledge of the market.” (David Arnold, FT Press)

Does my company really need an office?

Standalone market entries are done by companies ready to take capital risk and to gain over time the knowledge associated with the new markets, accepting the risk of not depending on others (local partners) to gain experience.  One of the factors in deciding the type of entry strategy to go for is the cost or investment size, the most extensive and expensive strategy being, of course, to set up a full-size operation in Japan (with branches in various cities, warehouses, factories and R&D centres).

Major Benefits include:

  • Getting closer to the customers (a key account might ask for a presence in Japan or for same time-zone responses to questions or requests)
  • Increasing sales (Japanese customers prefer to deal locally in Japanese with local staff)
  • Wider margins (having your own sales organization in place reduces dependency on intermediate distribution channels)
  • Monitoring competition and market trends (acquired thanks to customer feedback)

Major Costs include:

  • Start-up costs (legal and administrative costs depending on the legal structure chosen)
  • Operating costs (office space, accounting and law firms, professional services …)

Better Incentives for Investments

The Japanese Company Law was drastically modified and the new law came into effect in May 2006. Its aim was to back up and enhance the creation of new companies. The major reform points were the following:

  • Abolition of the required minimum capital (from ¥10 Million down to ¥1 for a joint-stock company): the previous capital restrictions were supposed to prevent the creation of too many new companies by venture businesses, while actually not being effective in protecting creditors of such companies.
  • Abolition of the Limited Company or “Yugen-Gaisha” (YK)
  • Simplification of the procedures for setting up a company
  • Greater flexibility allowed in the organizational design of companies (with or without board, number of board directors/statutory auditors/accounting auditors/executive officers …)
  • More autonomy in writing the articles of incorporation

Furthermore, in April 2012, the Japanese government revised the rates of corporate tax downwards, aiming at boosting the Japanese economy and also at encouraging business investments from abroad.

Among recent incentives to attract foreign companies and investments in R&D facilities and Asian regional headquarters, the Japanese government has implemented the Comprehensive Special Zone Systemwith special regulatory measures and tax, financial and fiscal support measures as a comprehensive policy package. In December 2011, 7 zones or (Industrial) clusters were designated nationwide.

In addition to these clusters, following the devastating March 2011 earthquake in the Tohoku region (North-East Japan), the government created a Special Zone for Reconstruction, together with a new governmental agency (the Reconstruction Agency) with a view to promoting and coordinating all the policies and measures for reconstruction in an integrated manner. Involvement of the private sector (including foreign private investors), as well as a variety of provided incentives (tax breaks, financial support, grants, reduced regulations …), are key to the open reconstruction process. Further details and opportunities are available from a dedicated website: www.reconstruction.go.jp.

Summary of major Methods of Incorporation

1)    Representative or Liaison Offices:  no registration needed but no sales permitted, no bank accounts, no office lease in its own name. As the liaison office is not a legal entity, the company representative usually contracts on an individual basis. Neither does it show the long-term commitment of the company. After the liaison office, the next phase is the creation of a branch office or a subsidiary.

2)    Branch Offices: registration needed but no own legal corporate status. Sales permitted, may open bank accounts and lease an office in its own name. Ithas the benefit of being less costly and the procedures are much simpler. For some companies, a branch as an extension of the headquarters fits best with their legal and tax structure. However, it is regarded in Japan as a local organization that operates business transactions upon authorization from a headquarters located abroad. It is usually not the best way to show the group’s long-term commitment in Japan or to build trust.

3)    Subsidiaries:   limited liability of the shareholders to the assets, separate corporation from headquarters, registration needed. There are two possibilities:

  • Joint-stock corporation or “Kabushiki Kaisha” (KK): separation of ownership from management, yearly approval of financial statements, financial results to be published, with or without a board (different options possible)
  • Limited Liability company (LLC) or “Godo Kaisha” (GK): unification of ownership and management (the owners are the managers), greater freedom (in writing the articles of association), also suitable for a small-scale business

A subsidiary is however the preferred structure: in spite of higher start-up costs, it offers the following important advantages:

  • Sign of long-term commitment to the Japanese market. The foreign company becomes a local firm and is treated as such.
  • Ability to sell shares of the Japanese company to raise funds for strategic operations,
  • A legal shield that prevents liability in contract and labour disputes to impact headquarters

Recommendations for Incorporation in Japan

1)    About the closure of a Branch Office:

Branch offices can be closed down in two ways: by registering the closure of the branch office or by registering the resignation of all its representatives in Japan. Creditors of the branch office must be given a period of no less than one month prior to the closure to submit objections to the closure of the branch office.

2)    About upgrading a Branch Office into a Subsidiary:

A Branch office cannot be directly reorganised into a joint-stock corporation (KK) or a limited liability company (LLC). The branch office closure procedures and the subsidiary company establishment procedures must be carried out simultaneously. In such cases, the branch office's assets may be passed on to the subsidiary through investment in kind.

3)    About upgrading a LLC into a KK:

The new company law has made it possible to upgrade an LLC into a joint-stock company KK. That is, a careful way to proceed for newcomers in Japan would be to start their business on a small-scale level with a LLC in the start-up phase and to upgrade later into a KK.

4)    About dissolution and liquidation of a Subsidiary:

Creditors of the subsidiary must be given a period of no less than two months prior to the liquidation to submit objections. Should the subsidiary have negative net assets, the corporation must follow some special liquidation procedures under the direction of a court.

5)    Bilateral Tax & Social Insurance Treaties:

Japan has bound bilateral tax treaties with over 50 countries. Such tax treaties aim at avoiding double taxation and unfair tax treatment in bound countries. Similarly, there are bilateral treaties in respect with pension and health plans. Social insurance cover is mandatory for most corporations in Japan.

6)      For Small Firms, due to the higher set-up costs, the direct sales option is less obvious but is available and makes sense.

The EU-Japan Centre Report “EU SMEs present in Japan with a branch office – A Mapping Attempt », published in April 2013, confirmed that activities of the SMEs established in Japan (Direct sales) were more oriented (60% of total) towards providing high technology goods (aerospace, automotive, electronics, nanotechnology) and services (mainly software engineering and ICT sector). Comparatively, food-related SMEs were more oriented towards finding local partners (Indirect sales).

For Large Firms, with different business units selling different kinds of products through different sales channels, the set-up of (eventually a liaison office first and afterwards) a subsidiary is the obvious entry strategy. The initial small sales and technical team will sign up, manage and support a network of non-exclusive dealers/resellers.