Following a period of rapid expansion, Japan's economy has experienced slow economic growth since the late 1980s. Nevertheless, the Japanese medical and dental supplies import market has shown steady growth over the last several years. In 1995, while the Japanese medical market grew only 3%, U.S. medical exports to Japan grew 23% to a total of almost $5 billion. Based on numbers from the Health Industry Manufacturers Association (Washington, DC), this figure represents almost one-quarter of Japan's $21.1-billion medical market. Such rapid growth should continue well into the next century, offering tremendous opportunities for U.S. medical device manufacturers.
To take advantage of this growing market and plan strategies for doing business in Japan, U.S. executives will need to understand the macroeconomic changes taking place in Japan today. In the last few years, Japanese consumers have become more cost conscious, making acceptance of lower-priced U.S.-manufactured products more widespread. This has opened up Japanese society to Western-made products.
Also, because the U.S. dollar has over time significantly depreciated in comparison to the yen, U.S. products are much more affordable to Japanese consumers. In addition, many of Japan's distribution networks, which have historically served as a formidable barrier against U.S. products, are collapsing, resulting in fewer distribution layers and ultimately lower costs to Japanese consumers. Because Japan's government has been looking for more cost-effective options to satisfy Japanese consumers, the market has become more open to foreign products.
U.S. medical device companies can penetrate Japan's medical market using one of three marketing strategies. For companies that want to tap into small- and medium-sized markets in Japan, the best strategy is probably to export to a Japanese importer or distributor. U.S. manufacturers should keep in mind, however, that as the Japanese distribution system changes, the role, duties, and value of a distributor will also change.
Companies that discover large market opportunities for their products in Japan should consider setting up their own local offices. Even though setting up a business in Japan is expensive, companies can find cost-effective solutions. Finally, some companies can use direct marketing techniques such as advertising in mail-order catalogs or on the Internet to bypass the traditional Japanese distribution system.
To determine the appropriate strategy, companies should first invest in primary market research. Such research should focus on the size of the particular market and its potential for growth. In addition to interviewing doctors and hospital administrators, researchers should speak with key Japanese government officials involved in medical care and leading doctors in Japan to understand new medical trends.
USING A JAPANESE DISTRIBUTOR
If there is a small- to medium-sized opportunity in Japan, and a U.S. medical device manufacturer does not have the resources to open a local office, it should identify and work with a Japanese distributor to enter the market. Before undertaking such operations, however, U.S. companies should understand the Japanese distribution network.
Japan's Traditional Distribution System. In general, the distribution system in Japan has four major characteristics, the first being the vast number of retailers. Per capita, Japan has more retail outlets than the United States, 1 for every 69 individuals (the United States has 1 for every 126).1
Second is the abundance of distribution layers or channels. In the 1980s Japan had an average of 2.2 layers between producer and retailer, in comparison with only 1.0 in the United States and 0.73 in France.2 Because the price of products increased each time they were sold to another distributor, the abundance of distribution layers in Japan led to very high retail prices.
Third, in Japan, manufacturers control the distribution system by using such tools as suggested resale prices, company stores, and significant rebates to ensure customer loyalty to their products.
Finally, all companies in the distribution system work together for mutual benefit. Close personal ties among executives of these firms reinforce their business relationships. These executives work for the good of the group of companies rather than for that of the individual company. Such a cooperative effort by multiple companies is known as the keiretsu system. This system is made up of vertical and horizontal relationships among large companies and their banks, distributors, and suppliers. In these groups, the success of one depends on that of the whole. Such relationships, which often include hundreds of firms, were one of the driving forces behind Japan's economic recovery after World War II.
Changes in the Distribution System. The following are some of the factors that are dramatically changing the Japanese economy as well as the Japanese distribution system.
- Japan's Fair Trade Commission, an agency that handles antitrust issues, has increased in strength in the last several years and has initiated a variety of changes that have made it easier for foreign companies to penetrate the Japanese market.
- Many of the Japanese business practices that were widespread in the 1980s (e.g., lifetime employment and consensus decision making) are beginning to decline in popularity, leading to some instability in the Japanese system.
- Japanese consumers have become more cost conscious. This makes it easier for foreign companies to sell to Japanese consumers who were previously loyal to Japanese brands no matter how much more expensive they were.
The Japanese distribution system, which once served as a barrier to U.S. companies trying to break into the Japanese market, has begun to change. Changes in business regulations, consumer behavior, and the state of the Japanese economy are breaking down some of Japan's distribution layers. As the number of distribution layers falls, retail prices will also fall. Foreign medical device manufacturers should be aware of these changes when they select a Japanese distributor.
SETTING UP AN OFFICE IN JAPAN
If a U.S. medical device manufacturer finds through market research that there is a large market for its product, or if its sales are growing quickly through the use of a Japanese distributor, it should consider opening a local office in Japan. Such a presence will:
- Allow a U.S. medical device manufacturer to increase its overall exposure and corporate identity.
- Make it easier to modify products to meet local market needs.
- Make it easier to work with selected distributors or to build its own sales force to sell directly to Japanese customers.
Maintaining an office in Japan will enable the U.S. medical device manufacturer to become more competitive in the Japanese market and ultimately increase its market share.
Office Type. There are three possible legal structures a local office can assume.
Representative Office. A company can set up a representative office to promote its activities in Japan. Because they do not require registration documents, representative offices are easy to set up and extra costs are minimal. Unfortunately, such offices are limited to promoting only a company's business and are not permitted to perform any business transactions such as sales, importing, shipping, invoicing, and related activities.
Branch Office. A branch office, unlike a representative office, can perform the above-listed business functions. However, it needs to be registered, and certain fees, procedures, and paperwork need to be submitted to obtain governmental approval to operate a business in Japan. In addition, branch offices are generally subject to corporate income tax in Japan.
Subsidiary Corporation. Subsidiaries attract local financing and local employees. On the other hand, they are more expensive to set up with the government than branch offices because the government requires a minimum capital investment of 10 million yen (the equivalent of about $100,000). The company does not lose this money, however, because the government refunds the investment to the parent company after one month. In addition, government regulations require subsidiaries to have a board of at least three directors, one of whom is required to live in Japan. Subsidiaries also face more stringent taxes than a branch office does.
When determining which structure to set up, companies should evaluate the cost of opening an office for just a general manager in Japan. Such an arrangement can work for any of the three legal structures.
Recruiting a General Manager. A foreign medical device manufacturer should consider hiring a general manager who reports directly to the parent company to handle its business in Japan. A U.S. firm can establish a local presence just by employing such a manager. Although each company's situation is unique, there are some general guidelines to observe when looking for a general manager. The Japanese executive should be between 40 and 50 years of age, have a minimum of 10 years of related medical experience in Japan, and be bilingual. A seasoned general manager should be paid a salary and a Japanese-style bonus (a guaranteed bonus equivalent to anywhere from two to six months' pay) together equaling about $200,000 annually, in addition to a bonus based on both company and individual performance of about $25,000 to $50,000 per year. The U.S. firm will also need to pay an additional amount equalling approximately 25% of the manager's salary to the Japanese government and appropriate private groups to cover health-care and retirement account costs.
Human Resources Regulations and Rules. Every foreign company that employs a Japanese citizen must prepare a "constitution" that outlines the company's personnel program, accounting procedures, and administrative rules. This document needs to be submitted in both English and Japanese. The company is required to compose it regardless of the legal structure of its operation in Japan.
Annual Operating Costs. It is difficult to determine the annual budget for a general manager in a one-person office in Japan. Not including monthly rent, yearly office expenses could range between $75,000 and $100,000. Telephone and facsimile communication, travel, business entertainment, and promotional efforts add up quickly. For example, quality business dinners for four in Tokyo with some form of modest entertainment can easily cost $2000. And, while it is not necessary to publicize an increased presence in Japan, some form of public relations is strongly recommended. Such formalities and protocol are more common and expected in Japan than in the United States.
Office Location Options. There are a number of possible office options for a one-person operation.
U.S.-Based Office. The simplest, cheapest, but least-attractive option would be to station the Japanese general manager in the company's U.S. location and require him or her to fly back and forth to Japan as needed. This option does not entail any rental costs in Japan, but a U.S. firm cannot maintain a Japanese representative or branch office with this strategy.
Japanese Home-Based Operation. Another option is to arrange for the general manager to work from his or her home in Japan. The disadvantages of this arrangement are the same in Japan as in the United Statesbusiness meetings generally cannot occur at one's home and new employees cannot be easily added.
Office at a Distributor. Another inexpensive, or perhaps no-expense, option is to use space at one of the manufacturer's distributors' offices for the general manager. While this might appear to be an ideal solution, if the U.S. company has multiple primary distributors in Japan (e.g., for different geographic areas or product lines) it could appear to indicate favoritism toward one distributor over others.
Subletting in a U.S. Office. Oftentimes, a foreign medical manufacturer can sublet space in another U.S. firm's Japanese location. A related U.S. company might offer this option to demonstrate good faith and interest in developing a business relationship. The cost for this type of sublet arrangement in a good business area of Tokyo might run about $750 per month or $9000 per year.
Shared Executive Office. A foreign company can elect to rent a small space in a shared executive office in or outside Tokyo. In general, such space in Tokyo will cost about $2500 per month or $30,000 for a year; outside Tokyo, it will run about $1250 per month or $15,000 for a year.
Independent Office. A medical manufacturer can also elect to get its own small independent space in or outside Tokyo. In general, such a space will run about 25 to 50% more than the figures quoted for a shared executive office. In addition, in some office leases there is a 6- to 9-month rental deposit required, which may not be refundable.
Another option for some U.S. medical device manufacturers wishing to sell their products in Japan is direct marketing. Direct marketing bypasses the distribution system by selling directly to Japanese consumers through mail-order catalogs and the Internet. This practice has been growing rapidly in Japan over the last few years. According to the Japan Direct Marketing Association (Tokyo), direct marketing sales in Japan for all products (not just medical) totaled $20 billion in 1994. U.S. direct marketers reached $1 billion in sales to the Japanese market in 1995.
Although a company can circumvent most of the distribution layers in Japan by using direct marketing, to be successful it still needs to adhere to government regulations and to address the needs of Japanese consumers. For example, medical products listed in mail-order catalogs must be approved and licensed by Japan's Ministry of Health and Welfare (MHW), and the catalog must include approval numbers and license dates. Medical equipment without such approval cannot legally be advertised, sold, transferred, or leased. In spite of these limitations, many unapproved medical products continue to be marketed in Japan. Publishers who include unapproved medical products in their catalogs face repercussions once competitors find out.
One loophole does exist, however, for companies to sell unapproved products to Japanese purchasers. Some American dental manufacturers are marketing their products in Japan through mail-order techniques. The Pharmaceutical Affairs Law, which requires imported dental products to be registered in Japan, does not apply to individual dentists importing for their own use. According to the Pharmaceutical Affairs Bureau of the MHW, direct import for a dentist's own use is allowed up to two units, or two sets, of products. There is also no duty for such products. This loophole allows dental products to be legally imported by individual dentists without entering the Japanese distribution system or becoming subject to the government's regulatory process.
U.S. dental manufacturers who are marketing through mail-order catalogs are taking precautions to keep the Japanese government from finding fault with their mail-order practices. One such precaution includes establishing a call center in the United States instead of in Japan to keep mail-order sales from being viewed as a "business" by the Japanese government. They are also making the ordering process as easy as possible for Japanese customers by staffing U.S. call centers with Japanese-speaking operators and printing their catalogs in Japanese.
Although the government has the authority to prevent the import and purchase of these unapproved dental products for business purposes and not for personal use, it is doing nothing to stop businesses and medical professionals in Japan from taking advantage of this loophole. Analysts disagree on whether MHW will enforce the restrictions it has created. Many feel that MHW will not act quickly to close the loophole, allowing individual dentists to continue to purchase dental products via mail order in small quantities for their own use. On the other hand, some fear that if dentists are purchasing the same items often and repeatedly, MHW may consider mail-order sales as a business and force the dentists to get a license to continue purchasing.
With respect to selling other health-care products through the mail, a recent amendment to the Japanese Pharmaceutical Affairs law regulating cosmetics, vitamins, and skin-care products now permits importing these items for personal use with some restrictions. But it is unclear whether direct mail-order sales will be possible for the importing of traditional medical devices. According to Allan Christian, at the Japan Export Information Center (Washington, DC), "The Japanese government [MHW] has blocked attempts to liberalize the regulations affecting the direct marketing of medical products to doctors and other medical professionals." He adds that it is unlikely the Japanese government will loosen restrictions enough for foreign medical manufacturers to consider "mail ordering through catalog sales a viable option." The ambiguity with which the government handles mail-order sales and the disagreement among analysts about what the government will do in the future demonstrates the uncertainty surrounding mail-order sales of unapproved products.
Companies that plan to market approved products in mail-order catalogs should follow a few practical guidelines. Catalogs should be translated into Japanese or have a Japanese-language insert that explains each of the products. The translation should be done by a professional translator to ensure that the product descriptions are clear and understandable.
The Japanese mail-order list industry is not as sophisticated as its U.S. counterpart. In order to ensure that the correct list is purchased, it is advisable to work with an international list expert or a Japanese list expert who clearly understands the U.S. system and what is needed. To expedite mail delivery, the labels should be printed in Japanese characters with Japan written in English.
For firms establishing call centers, 24-hour, toll-free phone and fax ability with ordering and customer information in Japanese is essential. A call center should be able to process payments in yen, handle COD transactions, accept credit cards, and process refunds and returns. The manufacturer must decide whether to use an exchange rate fixed daily, weekly, or monthly. It should also generate customer feedback reports. Such feedback, whether in the form of complaints, questions, or praise, assists the company in tailoring services to meet the expectations of Japanese consumers.
Call-center employees should be native Japanese speakers who are knowledgeable about the products. Accurate, current information about the availability of inventory is neededoften this entails establishing an electronic link between the company's warehouse and the call center. Ability to track packages is important, too. The call center should also stock catalogs to send to interested customers.
DIRECT MARKETING VIA THE INTERNET
The Internet has proven to be a new venue for companies to directly market their products around the world. In 1995, there were 6 million personal computers sold in Japan, a 65% increase from the previous year, and it is estimated that another 7 million will be sold in 1996. Even though Japan's growth has been considerably slower than that of the United States in both computer and Internet usage, the last 18 months have shown strong growth in both areas. One reason for the slow growth in Japan is the high cost of phone line usage. However, as Japan's telecommunications industry deregulates and telephone prices drop, Internet use should grow significantly.
The Internet is becoming a popular and accepted way for Japanese consumers to purchase the goods they want and therefore is a viable direct marketing tool for some U.S. medical device manufacturers. In fact, several small American medical companies have already begun using it.
The most productive way for foreign medical manufacturers to use the Internet is to create home pages with electronic catalogs that allow Japanese customers to see products as they order them. A manufacturer's web site should be easy and quick to use and include pictures of the goods. Just as with print catalogs, a manufacturer's home page should include clear and concise descriptions of products as well as ordering instructions in Japanese.
Security and credit card protection is also a big issue. Hiring a computer consultant is advisable to ensure the security of customer credit card information.
With the dramatic changes that are taking place in Japan, U.S. medical manufacturers need to follow appropriate and timely marketing strategies. The first step is to determine the size of the market opportunity for products in Japan. Companies also need to monitor current marketing trends in Japanwhat worked for U.S. medical companies five years ago may not be the best strategy today, and the best strategy today may not be the best strategy in five years.
1. Fahy J, and Taguchi F, "Reassessing the Japanese Distribution System," Sloan Management Rev, Winter, p 49, 1995.
2. Fahy J, and Taguchi F, "Reassessing the Japanese Distribution System," Sloan Management Rev, Winter, p 50, 1995.
Ames Gross is president and Elaine Conavay is an associate at Pacific Bridge, Inc. (Washington, DC).