What has proven to be an important way to break the trade barriers imposed by the Japanese distribution system?

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As America’s trade deficit soars, we keep pointing the finger of blame at the Japanese. The complaints ring out time and again. The Japanese aren’t serious about opening up their market, while we’re giving ours away. Their trade barriers are as high as ever, while ours are insignificant. Their government does everything to facilitate their corporations’ penetration of our market, while our government does nothing. The result: we can’t sell to them at all, while they’re taking over our market.

Certainly the Japanese did erect barriers to foreign companies, including high tariffs and a set of inordinately complex trade regulations. And certainly a buy-Japanese attitude used to prevail among Japanese companies. But what about our own barriers? The average weighted level of U.S. tariffs is 4.2%, while Japan’s is only 3%. Our single tariff on Japanese motorcycles has been as high as 49.5% and still exceeds 18%. We protect producers of textiles, sugar, ships, dairy products, and military equipment. Indeed, more than 40% of the goods that Japan exports to the United States are under some form of restraint, either “voluntarily” or through quotas or tariffs.

In truth, the trade rules of the Japanese market—like our own—are not carved in stone. Just as Japanese companies have made inroads in the United States, so American companies have sold significant amounts in Japan. These companies have learned that no one is going to hand them increased market share in Japan on a platter—they have to earn it. And in many cases, they have:

• More than 50,000 U.S. products are being sold in Japan. U.S. companies are represented in more than 85% of Japan’s 126 industrial sectors, and at least 12 hold the number one market position in their fields. In the soft-drink market, Coca-Cola has a 60% share; Warner-Lambert’s Schick razors hold 71% of the safety-razor market; and McDonald’s is the top fast-food chain in Japan.

• American high-technology companies have come on strong, including IBM with 1985 sales of $3.5 billion; Digital Equipment, whose Japanese sales have grown ten times in the last seven years; and Polaroid, with 66% of the Japanese instant-camera market.

• Since 1982, U.S. computer sales to Japan have increased by 48%; telecommunications equipment, by 38%; pharmaceutical products, by 41%; and electronic parts, by 63%.

Why has this positive news gone unheard? For one thing, the most prosperous companies often keep quiet about their success while publicly joining the chorus of complaints about Japan. After all, they don’t want to spread the word about this lucrative market too widely for fear of attracting competition.

The issue of U.S.-Japanese trade is too important to allow private competitive fears to rule. It’s up to U.S. companies that have done well in Japan to stop hiding their success. The real story has to come out. And other American managers need to understand the potential of the Japanese market before they simply write it off as a lost cause.

Myths About Japan

Many U.S. executives picture Japan’s market as a quagmire in which it’s easy to expend valuable resources but come away frustrated and empty-handed. While once very accurate, this image is today more myth than reality.

American managers need to sort through the collection of myths if they are to penetrate the Japanese market in large enough volume to alter the current trade imbalance very much. Here are a few worth reconsidering:

1. The Japanese distribution system is impenetrable.

The route from manufacturer to consumer in Japan is indeed complex. More than 1.7 million retailers serve Japan’s population of 120 million, which lives in 651 cities, 1,997 towns, and 607 villages scattered over the habitable 19% of the country’s mountainous terrain. Small “mom and pop” stores are a mainstay, and they typically buy from trusted longtime suppliers. Moreover, the distribution chain is long, diverse, redundant, and often “controlled.”

Successful foreign companies do not tackle the system head-on. Instead, they hire experienced distribution companies from among Japan’s 8,000 domestic trading companies, or they form joint ventures. Schick, for example, challenged Japanese dominance of the razor market and now holds a 71% market share. It entered Japan in 1960, when two domestic companies held 80% of the market. With a cutlery distributor, Hattori Seiko, as its exclusive agent, Schick launched an advertising campaign showing that stainless steel blades were safer and more durable than Japanese carbon steel, double-edged blades. The company reinforced its point by mailing five million stainless steel blades to Japanese men.

2. Product testing and certification requirements make it impossible for foreign companies to enter Japan.

Japanese government regulations, like our own, are designed to protect consumers. Testing procedures for products ingested or used in close contact with people are rigid and time-consuming. Pharmaceuticals in particular are more difficult to certify in Japan than anywhere else.

SmithKline Beckman Corporation spent more than four years obtaining approval from the Ministry of Health and Welfare for Tagamet, a product used to treat ulcers. Preclinical and clinical data had to be meticulously compiled and presented to the ministry. SmithKline’s patience paid off. Today Tagamet is widely accepted in Japan and in 120 other countries. Worldwide sales are approaching $1 billion.

3. Japanese will buy only Japanese goods. Japanese culture has long placed a premium on supporting locally made products. Japanese politicians and policymakers have encouraged this support to create national wealth.

In recent years, however, the buy-Japanese attitude has begun to crumble. Gleason Corporation, for example, produces a bevel gear-cutting machine of a quality Japanese manufacturers have been unable to match. With 2,000 machines in place, Gleason has 90% of the Japanese market; Toyota and Nissan have each bought more than 500 machines.

The buy-Japanese image, in my view, is perpetuated by U.S. companies that have tried to sell standard products or dump surplus inventory in Japan and other overseas markets. U.S. products that have not been modified to meet Japanese technical standards or consumer tastes, sizes, and needs are simply unsuitable. Yet when Americans encounter resistance, they often ascribe it to a desire by the Japanese to buy only from other Japanese.

In truth, Japanese companies don’t always favor Japanese suppliers. Shoichi Saba, president of Toshiba, a major semiconductor manufacturer, says, “When superior products are available at competitive prices in the international marketplace, Toshiba purchases them, and this improves our competitive posture.”1 The company buys abroad about $42 million worth of semiconductors, including about $4 million worth of chips from Intel Corporation.

4. Japanese cannot be recruited to work for a foreign company.

Employment in a well-established Japanese company brings a prestige that foreign companies can’t match. In fact, Japanese parents exchange resumes of prospective marriage partners. Few U.S. companies can offer the secure, paternalistic environment familiar to the Japanese. As a result, some have had difficulty hiring Japanese workers and managers.

But like other Japanese cultural characteristics, job preferences too are changing. Many young people have become unhappy with low entry-level salaries and are unwilling to wait for salaries tied to seniority status. Promotions come slowly, competition is intense, hours are long, and there is little time for a private life away from work. Moreover, except in some of the most sophisticated computer companies, young people have little opportunity to be creative—deru kugiwa utareru (“the nail that protrudes will be hammered down”) goes a well-known Japanese saying. Thus as U.S. and European companies gain more visibility, the stigma of working for a foreign company is fading.

Digital Equipment Corporation, for example, has soared in popularity as a place for Japanese to work. It has fully staffed its subsidiary’s management and sales force with highly qualified Japanese. In six years, Digital’s work force has climbed from 150 to 2,000; the company recruits at least 200 university graduates each year. Digital representatives call on professors who serve as career guidance counselors as well as on parents, who have much more influence on students’ career decisions than do parents in the United States. In an annual survey conducted in Japan among college and university students to determine which companies they would like to work for, Digital has climbed to thirtieth among college men and sixteenth among college women from ninetieth overall three years earlier. To identify and hire experienced salespeople, Digital uses executive search firms, which have become useful resources for many foreign companies. Last year, 15,000 Japanese applied for employment with Digital.

Breaking the Barriers

U.S. companies that have succeeded in Japan have approached the market in the same way Japanese companies have approached ours. That is, they haven’t been dissuaded by initial failures. We tend to overlook the fact that even today’s most successful Japanese companies—Toyota and Honda—made serious mistakes in their early years in the United States. Yet they worked hard to adapt their products to our consumer needs and pattern many of their approaches after U.S. companies.

Successful American companies have penetrated Japanese markets first by overcoming legal and regulatory barriers, then by overcoming cultural and social barriers. The first is no simple task; it requires a great deal of patience and persistence. But the payoff can well justify the effort. Here are some suggestions for dealing with these barriers:

Keep probing the distribution system. As I noted earlier, the Japanese distribution system is complex, and a company can expend much effort finding the right outlet. But once that outlet is discovered, the opportunities can be quite impressive.

For five years, the California Almond Growers Exchange persisted in its effort to get almonds into the Japanese marketplace. It hired a trading company in 1969 but soon realized that almonds weren’t a big enough item from the trading company’s perspective to push aggressively. Wholesale dealers as well proved unsuccessful, since a single dealer may handle as many as 2,000 kinds of merchandise and often fails to get new products tried and accepted. Distribution networks for related products like chocolates and liquors couldn’t help get almonds out in a big way.

One thing the almond growers’ efforts did accomplish, though, was getting the product noticed by Coca-Cola in Japan. In 1974, the company asked to distribute the nuts as part of a sales promotion campaign. It had in place 15,000 salespeople, 500 sales offices, and 1.1 million sales locations throughout Japan. The campaign was so successful that the exchange continued to use the Coca-Cola network. It has since cornered 70% of the market in Japan and expects to double sales by 1990 and quadruple them by the year 2000.

Find the best partners possible. Because so much business from foreign markets is done with Japanese partners, going this route is often preferable. Partners can help obtain government approvals or penetrate closely knit Japanese industries.

In 1969, McGraw-Hill established a joint venture with Nihon Keizai Shimbun, publisher of Japan’s foremost business daily newspaper. The venture was profitable in its first year, producing a semimonthly magazine called Nikkei-Business, a Japanese version of McGraw-Hill’s Business Week. Today Nikkei—McGraw-Hill produces 12 business magazines, 4 newsletters, and 7 electronic media services. Revenues in 1985 exceeded $135 million.

Mead Corporation joined Toppan, Japan’s largest printing company, in a joint venture in the late 1960s. Mead-Toppan, with an all-Japanese management, produces packaging products. More than 80% of Japan’s beer and soft-drink bottlers now use Mead-Toppan’s linerboard containers to distribute their products. Mead also leases package-making equipment to Japanese bottlers and sells pulp through this successful joint venture.

In 1968, Texas Instruments made plans to manufacture and sell integrated circuits in Japan. Management insisted that TI would not sell integrated circuit licenses to a Japanese company unless TI had its own wholly owned company in Japan. At the time, Japanese regulations permitted entry only through a joint venture.

Yet as these regulations were gradually relaxed, TI was able to achieve its goal. It established a joint venture with Sony Corporation with the understanding that Sony would sell back its 50% ownership within three years. Today Texas Instruments is the lowest cost, largest producer of semiconductors in Japan and is shipping chips from Japan to the United States.

It’s important to investigate potential partners, not only for their integrity and efficiency but also to determine whether they have experience in your market and are willing to put enough muscle behind your product. The right partner can prove invaluable in sidestepping the various traps that lie hidden in the Japanese regulatory process. The wrong partner can simply take up valuable time and resources.

Don’t be afraid to end-run the system. In some situations, it’s better to avoid the labyrinth of distributors, particularly when you want to sell directly to consumers. Although small neighborhood retail stores are firmly established in Japan, 7-Eleven Stores defied tradition and opened a network of 2,400 “super stores” that has achieved sales of more than $1 billion annually. The chain can offer highly competitive prices through large-scale procurement and gives customers the convenience of shopping for a wide variety of goods in one store. It succeeded in large measure because it avoided the intricate, often overlapping, and redundant supply lines that many small Japanese retailers use. Instead, it deals directly with suppliers that provide discounts for volume buying.

Once companies surmount legal and regulatory barriers, they can turn to cultural and social barriers. In fact, these hurdles in Japan aren’t unlike those confronted in prosperous Westernized countries. Here are some approaches that work best:

Be prepared to modify your products to conform with the local culture and conditions. S.C. Johnson & Son, Inc. encountered resistance to its Lemon Pledge furniture polish among Japanese consumers over age 40. Market studies revealed that the polish smelled like a latrine disinfectant widely used in Japan during the 1940s. When Johnson reduced the lemon odor in the Japanese product, Lemon Pledge sales rose sharply.

Mattel couldn’t understand why its hugely successful Barbie doll failed to repeat its American sales success in Japan. A Mattel assembly line worker in California suggested that Barbie’s blonde curly hair be replaced by straight black hair and that the doll’s head be modified to give Barbie oriental eyes. A simple idea, and it worked: Mattel could barely keep up with the demand for the “new” Barbie doll in Japan.

When Procter & Gamble decided to sell laundry detergents in Japan, its market studies revealed that the usual washing machine water temperature in Japan is much cooler than in the United States, slowing the rate at which powder detergent dissolves. The company developed a new liquid detergent that became so successful in Japan that P&G decided to manufacture and sell it at home.

Emphasize quality. Quality standards for products, packaging, and service are high in Japan, often higher than in the United States. Products with international prestige sell unusually well.

Japan is a rich market for U.S. sports equipment. The golf market alone is almost $1.5 billion. Golf clubs are the leading sports product shipped from the United States to Japan, and Ben Hogan golf equipment is the most popular brand in Japan. Although Japanese technology has greatly improved in recent years, Hogan clubs continue to be the premier product because of their quality, the reputation of the Hogan name, and the company’s sophisticated marketing techniques.

For many years, ice cream has been enormously popular in Japan. Baskin Robbins and Haagen Dazs have become the most popular brands because of the high quality of their products—their butterfat content, taste, and variety of flavors.

Standard & Poor’s established an office in Tokyo in April 1986, aided by the Japanese consul general in New York, who put the agency in touch with the head of Japan’s Ministry of Finance. With a 125-year record of performance and a worldwide reputation for the quality of its people and its analyses, S&P was able to open its Japanese office within a matter of weeks after making the decision to locate in Japan. Already revenues from Japan have more than doubled since 1985, and more than 120 issues have been rated in Japan since April 1986.

Forge long-term links with the Japanese. Business in Japan is based on long-term relationships and a company’s reputation and credibility. Building these relationships is necessary if U.S. companies hope to hire top-notch Japanese managers and convince potential customers that they are serious about pursuing the Japanese market.

Converse shoe products have been successful in Japan, says managing director Elmer Butler, because “we have prepared ourselves with enough time and money. It would be very difficult for anyone to just come and do good business in Japan without such preparation.

“Our foreign business department began to develop the Japanese market about nine years ago. It translated a pocket-sized textbook on basic techniques of basketball into Japanese and sent a good coach to Japan to teach those techniques on the court. Through these efforts, Japanese basketball players and coaches came to know our products. In addition, we tried to strengthen the exchange of information with sales agents and partners for license production in order to study the way the Japanese do their business and what kind of products would be most suitable in the market.”2

SmithKline Beckman’s success in Japan can be attributed to its first manager, Henry Marini, who went to Japan in 1954 to work for Japan Air Lines. He learned the Japanese language, lived with a Japanese family, and became thoroughly familiar with Japanese ways of doing business. In 1977, as manager of SmithKline’s joint venture with Fujisawa Pharmaceutical Company, Marini worked closely with wholesalers, gradually reducing their numbers from 350 to 35; they became an “exclusive club,” dedicated to making SmithKline’s products successful. Moreover, with his understanding of Japanese culture, Marini could build a rapport with his employees and customers that became another important factor in the success of SmithKline-Fujisawa KK.

If they’re willing to be as creative and tenacious as they were in developing their domestic markets and as the Japanese have been in exploiting the American marketplace, U.S. companies can succeed in Japan. The best way to start is to move past the outmoded assumptions many Americans have of the Japanese marketplace.

U.S. companies that have gained market share in Japan have done so in large measure by doing their homework, setting long-term goals, and operating in the same commonsense way that made them successful in the United States. It’s pretty basic stuff, but it sure beats moaning and groaning like losers.

1. Shoichi Saba, “The U.S. and Japanese Electronics Industries: Competition and Cooperation,” Issues in Science and Technology, Spring 1986, p. 56.

2. Mainichi Shimbun, August 1985.

A version of this article appeared in the January 1987 issue of Harvard Business Review.

Which feature characterizes the business philosophy of Japanese distribution channels?

Are considered to be the foundation of the Japanese distribution system?

What did the export Trading Company Act accomplish?

Which mode of distribution affords the most control?