Goal of Japanese Government and Business
Within Japanese culture and throughout its history, there is one goal amongst those in power, whether governmental or corporate. This goal, as a general consensus, is to work. Japan, as a country, sets its goals on continued employment. Ultimate and life-long employment is considered happiness for the typical Japanese person.

It has been instilled in the everyday life of Japan that working and full employment is a sign of a productive society. Until western influence, Japan worked every day of the week. Sunday as a day off is a Christian influence that was not fully implemented in Japanese society until probably the end of WWII.

This way of thinking is very different from most western societies. In the U.S. and other western cultures, people tend to work in order to live. In Japan, like many other Asian countries, the people learn to "live to work". Work is the end in itself. The goal of Japanese economic and political activities is to accomplish full employment within Japan. Japan strives for continued zero unemployment.

Discussions on Full Employment
It is recognized in Japan that to move up the corporate chain, managers must try to maintain full employment. Those in management think of Japan, the country, rather than the company as a sole entity separate from Japan. The company must keep full employment in order to assist in Japan's goal of full employment in Japan. On the contrary, in the US, it is accepted to reduce workforce and still accomplish the same goal. (Decreasing the costs of production and in turn increasing profit)

Discussions on Growth in Size
To continue on the same line of thinking, in order to maintain full employment, growth is important. In order to achieve full employment, companies must grow in size. It is very rare to see increased lay-offs at Japanese companies, despite the decrease in profits. A large company with an enormous amount of growth in labor is seen as a successful company in Japan.

When Japan began setting up subsidiaries in foreign countries, mainly in the U.S., Japanese managers ran into much difficulty in managing local labor. Japanese companies could not understand the ideal of "working to live" in the U.S. For instance, leaving the office promptly at five is regarded as disloyal in Japan. However, this is common practice for blue-collar workers in the U.S.

The entire thinking of continued growth and full employment for Japan contradicts the ideals of a free market. Free market and opening up of Japanese markets to the world interferes with the Japanese government's goal in obtaining full employment and continued growth among Japanese labor. Free market has one meaning in Japan: foreign countries will be taking away jobs from local Japanese employees.

Profit vs. Revenue
One clear statement in Japan in regard to its financials is that Japanese do not pursue profit. Profit is considered to be a by-product of continued success of the company which focuses on growth and revenue. Japanese companies measure success by revenue and growth. From this aspect, Japanese companies are very successful.

Japan's Stock Market Evaluation
Japan's stock markets tend to be over priced, or their P/E ratio is very high, as understood by foreigners. In Japan, stock evaluation is based on revenue and revenue growth potential. Stock prices are very high because of their rules of "revenue as success."

This understanding and definition is different in other western societies. Stock prices in the U.S. and other countries are based on profit, hence, P/E ratio is low.

Due to the recent market crash in Asia, more Asian firms may move closer to the American or western style of business and accept an increased free-market philosophy. In many Asian countries businesses mimic Japan because of Japan's history of economic success. They also tend to mimic the Japanese goal for revenue, not profit. However, because of recent changes and ideals, things are rapidly progressing towards western business sense in Japanese society.

Not only do other Asian countries mimic the historic Japanese business ideals, they also mimic Japan's keiretsu system, as discussed below.

Zaibatsu, Keiretsu, Industrial Groupings
There is no American equivalent to the Japanese industrial groupings represented in Japan. The industrial groupings in Japan are called, Zaibatsu or Keiretsu. Zaibatsu is defined as a big business or financial clique. Keiretsu is a series or affiliated company. There are seven of these major cross holding companies in Japan. Examples of such company families are Mitsubishi and IHI. These families own major portions of the Japanese GNP.

An example with Mitsubishi is the family organization of MHI and MELCO, (Mitsubishi Heavy Industries and Mitsubishi Electric). MHI and MELCO tend to buy piece parts or manufactured components from other groupings in their family, the Mitsubishi family. (MHI will buy from MELCO and vice versa.) A common practice within these company families is that top level executives in the groupings of one company meet very often with other executives to set the tone to nurture the common philosophical background of top-level management.

In addition to the original seven holdings, newer companies are also developing as Zaibatsu. Examples of such newer zaibatsu are NEC and Fujitsu. These groupings primarily work with newer technology, such as computers and telecommunications. Even though they are new, they still tend to stick to their industry groupings for components and manufactured goods. As an example, computer hardware manufacturers use the same industry grouping who manufactures software. Fujitsu manufactures computer hardware and the software package for its internet is their families' product called Nifty. (Nifty is a division for Fujitsu ventured with Compuserve.)

Time will only tell which system of business is better. (Free Market or the historical Keiretsu/Zaibatsu)

Selling In and Exporting To Japan
There are many successful foreign companies doing business in Japan. It takes a very long time to establish a good relationship in business before success, however. Examples of such successful foreign companies in Japan are Coca Cola and McDonalds. Coca Cola has a large share of the soft drink market in Japan and McDonalds is one of the most successful fast food chains which is very profitable in Japan. McDonalds was successful even when Japan banned beef imports. They played a very difficult political game in Japan to allow beef imports solely for McDonalds use.

In Japan, whether a domestic or foreign company, you need to play politics very cleverly to your advantage in order to conduct a successful business. Motorola, an American company, holds a large market in the cellular business in Japan. They did not only compete in price and performance, but they also played politics. Another such example of a successful political player in Japan is Toy R Us. Toys R Us needs a large amount of floor space to open its business, this was initially against Japanese laws. They were successful in Japan with politics and have been accepted by the locals to open its doors. Even now there are many restrictions for companies to open up in Japan. But Toy R Us played very good politics and received exception status to the existing regulations.

In addition to the politics which must be played over a number of years before setting up shop, the foreign subsidiary must be very localized. They must be able to adapt to the Japanese way of life and philosophy. Many foreign companies were able to hold out with the politics and became very adaptable.

In summary, to be successful in Japan, foreign companies must have one of these two factors. (1) remain in Japan for a very long time to play local politics and (2) to establish their subsidiary as a localized company.

Non Tariff Barrier
Selling in Japan is very difficult. There are many reasons for this difficulty. A sales purchase decision in Japan is not made solely on price and performance as demonstrated in the US, many factors influence purchases. In many cases these other outside factors out weigh the price/performance ratio. There is an infrastructure in Japan that needs to be understood. This infrastructure is very large and difficult to understand. The infrastructure is between retail and wholesale. There are trading firms and a network of distributors which are entitled to some of the business before an end-products is sold. This contributes to very high prices for commodities.

Lately, many high-tech goods manufactured in Japan cost less in the U.S. Not only is it difficult for foreign companies to sell in Japan, it is difficult for domestic companies to sell, as well.

As an example, some companies could not get into the cellular phone market because of the political games which must be played with government authorities. They were not able to play, either they were too late in the game or just not successful. As for cellular, the government body for negotiations and games was the Ministry of Post and Telecommunications. (MoPT). MoPT controlled the cellular phone market in Japan and since some companies did not play a part in the beginning of this market they could not sell in Japan. Instead, they went to other foreign countries to market their products. In turn, these companies were very successful in these foreign countries. It is a lesson learned that you must play Japanese politics not only to survive but even to participate in the markets.

To export into Japan, it is even more difficult. As an outsider, you can not play the political internal games. The political games require a lot of time in Japan, even before you can set up shop. It takes time to develop the necessary relationships for doing business.

In Japan, there is one such concept to protect older companies who have already played the politics. This concept, described in Japanese, is Kitokuken. (Ki = already, toku = obtained, ken = right) Kitokuken is the right which has been obtained in the past. It is understood that this Kitokuken must be protected. An example of this right, (Kitokuken), is as follows. Let's say you have opened up a TV station in Japan after succeeding at the political games. If a new company comes along with a new product in the market called cable TV programming, this will conflict with your business. Your right to exist and maintain employment is threatened by this new company selling cable TV programming. Your right, which you obtained, is to sell TV programs. This right is protected very strongly in Japan and in order for this new company to sell cable TV programming must not infringe upon your existing right. These rights apply to both business and personal rights.

Once this right is established, it is necessary to be compensated when the right is threatened. This right is protected through politics, which is the same politics you played when you decided to open up the TV station.

In Japan, law follows what already exists. Or rather, law is made once something is established. Free trade does not exist in Japan and to a large extent it is due to this protection of Kitokuken. Because of current and historical regulations and the philosophy in Japan, foreign countries will find it very hard to do business in Japan. Many foreign companies try to persuade Japan to do more business using free trade. These foreign companies try to use common logic to persuade Japan. However, this seems not to work well.

Reasons Why Japan Must Change
There are a number of reasons why Japan must change their regulations and ways of conducting business. Reasoning is discussed below.

The loading and unloading of products at Japanese ports is very expensive. Because of this expense, companies had to look elsewhere to begin export. Many companies found that using other ports, such as Korea or China, to distribute or purchase goods is much cheaper than Japan. They have begun to minimize the usage of Japanese ports by using Korean or Chinese ports first, to separate goods. They separate goods onto smaller ships to make things easier in Japan for customs and export. Therefore, globalized competition will and has already begun to change Japan. Logically it makes sense to allow foreign shippers to use their ports all at once and not make it so expensive to do business. However, this change in some ways contradicts the Japanese belief. By changing, Japan is eliminating a large amount of its workforce necessary for full employment.

Partnership With The Japanese
Separate from the companies who established subsidiaries in Japan, there are a large number of partnerships between Japanese and foreign companies. Many of these partnerships are very successful.

Working with a local partner gives a foreign client a quick and fast entry into a foreign market. There are large benefits from forming a partnership. However, there are drawbacks, as well. One such drawback is the lack of goal congruency between your firms' and the Japanese partner. An American firm may strive for a good profit margin, whereas a Japanese firm strives for market share or size of revenue.

If your intentions and interests are to grow quickly and sell out for a large profit, then working with a Japanese partner may provide you with this goal. Using a partner may, in many cases, allow you to sell your Japanese and home country based activities to the partner when you desire. In turn, you will receive a large profit from the sale. The Japanese lack of interest in profit margin and strong interest in the size of business inflates the justifiable cost of takeover. In short, their allowable P/E (Price/Earnings) ratio is much higher than that of a Western firm or investor.

As an example, while the US public sentiment was against the sale of Rockefeller Center to Mitsubishi Real Estate, the actual seller laughed all the way to their bank. It is obvious that the seller did their homework as Mitsubishi recently decided to part with the holdings at a loss, after continually incurring a large loss since the property was bought.

Another episode is the Seven-Eleven sale. Seven-Eleven US, the originator of the idea of the Seven-Eleven convenience stores, decided that they needed a local partner to break into the closed but large Japanese consumer market. They teamed up with Ito-Yokado. The Japanese joint venture surpassed their US parent in size within several years. The US parent sold their share of the joint venture to Ito-Yokado because the US firm was not interested in shear size but in a decent profit margin. They achieved their goal by selling their share at a price which seemed to be much inflated to them, but not to the Japanese. The Japanese also achieved their goal because they doubled their revenue when they bought out the US firm's share. The Japanese eventually bought out Seven-Eleven US, as well.

When dealing with a Japanese partner one must consider potential risks and understand the reasons for this partnership. We recommend that you keep an independent advisor even after finding a local partner or establishing your local subsidiary. Your local partner will have their own agenda and you will need a consultant in order to ensure that your goal, and theirs, are congruent for as long as you work with them. If you decide to fund a local subsidiary, it will be a while before your local staff becomes a true part of your firm. You will need a consultant to ensure that you are treating them right and they you.

Profit vs. Revenue
There are different goals within partnerships. Foreign companies want to maintain profit where as Japan wants to concentrate on revenue and growth. American Companies want to maintain profit margin, as a result. If profit margin is high, price tends to be high, as well. In many cases partnerships enter into this problem of conflict in individual partner wants. A Japanese partner may not allow you to maintain profit margin and American partners may inhibit future growth of a company.

A good example is when many Japanese companies came to the US during the 1980's and bought out many American suppliers. Many Japanese companies complained after a purchase of an American supplier because much capital went toward new machinery, rebuilding facilities, and upgrades. In the US, unless there is a specific reason, companies do not purchase new machinery because of the expense. In turn, purchasing new equipment cuts into the company's profit. In Japan, they invest in better machines to improve the product, produce higher quantities, etc. Because of this basic philosophical and business goal, the Japanese and American goals are incongruent.

Many partnerships are successful but many are not because of these differences. Because Japanese allow for a low profit margin, there is a better chance that the Japanese company can buy out a partnership because their evaluation value for your portion of the partnership is higher than your evaluation of their portion.

As an example, if your company makes $100 revenue and profit is 10%, $10, the value of the company is different in the eyes of a Japanese partner. If you own 50% of your partnership and they own 50%, equal profit is $5 each, considering your 10% profit from the $100 revenue. If, in your eyes, your P/E ratio goal is 20, that means that if you want to buy their portion, which makes $5 profit, you would offer $100 for your partners portion of the company. To purchase their portion, you submit an offer of $100, based on the P/E of 20, (20x5). However, the P/E ratio of a Japanese firm is probably much higher because they don't need to maintain high earnings. Let's say the Japanese partner's P/E ratio is 50. With a P/E ratio of 50, they will offer $250 to purchase your portion. This $250 offer is much more than your value of the 50% portion. Therefore, it is a good deal to both you and the Japanese partner.

The result of such a partnership and buyout is that the American partner will make money on their sale of their portion and the Japanese partner will own more share of a particular market.

Ohashi High Technology is not predicting or dictating the future of Japanese and American partnerships, this information is used as an example of partnerships which occur in Japan, between western and Asian partners. This should help you understand the reasoning behind buyouts and business structures in Japan.

We should also keep in mind that Japanese companies have other purposes for importing products and creating partnerships. In many cases in the U.S., the purpose of such actions is financial. In Japan, their decision to import or create partnerships is also financial but most importantly, Japanese companies import and create partnerships in order to acquire knowledge. When Japan purchases or imports hardware from other countries or when they enter into partnerships, they use this tool of purchase to learn over many years how to conduct the same type of business. For example, many decades ago Japan established partnerships with many foreign countries, such as IBM Japan. This partnership was developed after much political game playing. In order for IBM to open up in Japan, IBM itself had to provide computer technology to several local Japanese companies. Fujitsu, NEC, Hitachi, and MELCO prospered in the computer field from creation of this partnership. This would be considered copying to us in the U.S., but in Japan it is called learning.

In American culture, if you try to imitate someone else's actions it does not cause positive feelings because of this "copying". But within the 2000 year history in Japan, learning by copying carries significant weight. The first wave of learning in Japan was called Kentoshi, meaning, sending dignitaries to China to learn. (Ken = send, to = Chinese Dynasty at the time, shi = representative) At this time, 2-3% of Japan's GNP was spent for this learning. During the Meiji period, Japan prospered from learning from the west. After WWII, Japan was again able to prosper. This prosperity, "Japanese Miracle", as it is commonly called in the west, occurred even after the devastation to Japan after WWII. They were able to prosper from learning from both the U.S. and Europe. Japan's basic philosophy for an affinity of learning still continues. Even recently in the telecommunications market this learning exists. Japanese companies have the same philosophy as a student. They are learning by looking at other products and developing the same products. Just as a student does not feel guilty for learning in school, Japanese companies feel the same sense of learning when they purchase or copy from other manufacturers' products.

Therefore, when outside products are sold to Japan, they are not only purchasing a product. Japan is learning how your product can benefit their society and how they can learn to manufacture and perfect this outside product, or market, as a whole. The knowledge may be more important than the product. In turn, this also occurs with partnerships created in Japan.

How to Compete Against Japanese Companies
In addition to using Japanese companies as vendors, which many American companies currently partake, there are other ways foreign companies can compete with Japan.

Japanese As Vendors
Don't try to compete against the Japanese, just use them as vendors. Many American companies already use Japanese hardware companies as vendors and since they produce such low profit approaches, it is difficult to beat them in their own game.

Play Against Japanese Weaknesses
Japanese are very weak in strategic thinking, but are strong in tactical approaches. They emphasize heavily on hardware, but not in intangible products such as software. In addition, Japanese have strength in hardware components but not in systems.