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The partner ecosystem in Japan

I want to jump into the number one piece of advice I give foreign companies trying to do business in Japan: find a partner or partners, and manage them well.

This is somewhat obvious to companies who have a modicum of knowledge about Japan. In fact, one could say that nearly everyone tries to do this. But even for those who do, it may not be so apparent why this is a good idea.

For example, the conventional thinking goes something like this: we lack Japanese language skills and don’t understand the market well, and we really don’t know if our product/service will succeed there, so let’s give a partner a try. That way we don’t need to invest much and we can see if we get traction.

Well, maybe all that is true inside your company, but it is almost the opposite of what you want to achieve in Japan. And this line of thinking can get you into trouble later when you realize that “dipping your toe in the water” is actually paying off and suddenly you want to get more aggressive.

Let’s start with what you want to achieve. Sure, you may be “dipping your toe in the water,” but that is the last thing a Japanese customer wants to hear, or suspect. Instead, there are specific expectations from Japanese customers that you should be aware of.

First, a partner is actually the preferred way to buy foreign products, even when there is some premium in pricing via that channel. There are several reasons for this:

1) There is an established ecosystem of partners that all play a role in the supply chain, starting with the systems integrator, often called “SIer” in Japan, who arranges and implements a whole solution. A foreign company would typically provide one or several components in an overall solution. If your partner is not the SIer for a specific customer, then that SIer will work with your reseller, and often the sales effort by the reseller is focused on the SIer. All of the different layers of providers get a piece of the profit.

2) Many Japanese companies have essentially outsourced IT and other operational functions to partners. They still have engineers or specialists on staff, but they don’t want a large headcount to do internal implementation and support. Therefore, they put a large burden on partners but also are happy to pay for that. Sure, everyone wants a good deal, but in the overall environment since the Bubble Period, Japanese companies have made half the workforce contractors and essentially outsourced non-core business functions. So partners are reducing overhead for their customers.

3) The support requirements are high in general, partly because of the outsourcing mentioned above, but also because Japanese think in terms of perfection. Maybe this mentality comes from the quality focus in Japanese manufacturing since WW II, or maybe it is cultural. In any case, defects are viewed very differently than they are in the West. In the area of software, for example, bugs require an explanation of root cause and a schedule for fixing. In my experience, an American company might care little about the root cause and can’t offer a schedule for fixing a bug, but it might get fixed quickly. The emphasis in the US is on fixing the bug, not on the reasons it exists and how it will be dealt with as an organization. A partner is often the way that bugs can get more attention and sometimes a partner can provide more insights about bugs to both the customer and the foreign vendor. Put another way, the customer can complain to the partner as they normally would, and the partner then acts as a buffer and facilitator.

4) Partners have long-standing relationships with their customers, and relationships carry weight in Japan. That may have been the first reason to use a partner that you have heard before, but in fact it is only one of several.

5) Unless the foreign company is already well established in Japan, a Japanese customer will prefer to rely on a partner to vet the product and company and perform the handholding they expect. A new, relatively unknown company and product will look quite speculative and potentially unreliable without an established Japanese partner representing it. This can even be true of relatively known companies who are new to Japan.

Oh, and a partner deals with their customers in Japanese, but that is a relatively prosaic function in light of the above. There are benefits to using English for foreign vendors, which will be the subject of another post.

Now, looking at the partner ecosystem from the point of view of Japanese customers, there are other expectations to consider. Japanese companies think in terms of long-term partnerships, and they are not so driven by quarterly revenue goals. So if your efforts in Japan smell of “trying something to see if it works,” then you will get little traction and potentially embarrass any partners. In addition, it can take much longer to get traction than you would expect. Initial reference customers are critical, as is a reputation that builds up over time. The Japanese market is littered with stories of foreign companies who failed badly, often because they didn’t have the patience required to succeed.

This last point becomes relevant to partner relationships when a foreign company wants to blame a partner for lack of revenue growth. It’s true that the partner may not be addressing the full market opportunity, because they rely on long-term relationships and have a heavy burden of handholding. So then there is a question of finding additional non-overlapping partners, or going direct. Often the decision to go direct does not account for the time required to develop a reputation, and it can seriously disrupt the partner ecosystem, which can have negative repercussions with customers.

It may well be the case that the market opportunity is less than expected. There is a tendency for trends in Japan to lag those in the US by a number of years. And often the trends develop differently, or with constraints that are specific to Japan. This is where managing partners involves a lot of market intelligence. The question of market size will be the subject of another post.

Finally, there is another very practical reason to use partners in Japan. The law basically forbids selling without establishing a branch office or subsidiary. And it can be difficult to hire local staff without a way to pay salaries, which requires a Japanese entity. Having a reseller makes selling possible even without a local entity, because they import the product and deal with customs duties and taxes. And in the best cases they can act as surrogate local staff. But there is still a need to manage partners well.