Working with Japanese trading companies
Because of these restrictions, a liaison office is best suited to doing market research as a prelude to directly entering the Japanese market, or, a liaison office can be a good outpost to scout out a trading company to use to export goods to Japan.
Using trading companies is a common way to enter the Japanese market because trading companies limit the risk and investment that an exporter faces. Setting up a subsidiary exposes an exporter to much more risk, and trading firms serve as a good way to actually test the market in a country.
Using a trading company simplifies matters for you in a number of ways. First, if you deal with the trading company on a principal to principal basis, where the trading company buys and then resells your goods, you will not be subject to a tax liability in Japan.
Also, trading companies provide sales people who have an established customer base and expertise in international trade, customs and finance.
The financing aspect should not be underestimated. Japan has many small wholesalers and retailers, many of whom can not receive financing from cautious banks. So in the place of the bank, a large trading company can step in and provide inventory financing which the wholesaler needs. Thus, without the trading company's financing, some export sales might never be made.
Only the largest trading companies can provide such financing, but these firms companies are used to importing large amounts. The largest 18 trading companies handle 62% of Japan's imports and 37% of its exports. The five largest trading companies each have annual sales of nearly $200 billion, and each trading company is closely linked with a corporate family or "keiretsu" that makes for a ready-made group of customers for your company's goods.
However, the size of a large trading company can be both an advantage and a disadvantage.
For example, the large trading companies by necessity deal with thousands of different goods, so their ability to provide support for a sophisticated product may be limited. For example, the same person who is now selling your computer network hardware may have been selling liquefied natural gas last year.
Also, the corporate family provided by a large keiretsu grouping may be a ready-made set of customers for you, but it also may represent the upper limit of sales because other keiretsu groups may not be as willing to buy from a competitor.
Fortunately, if you choose the trading company route, there are thousands of trading firms available, and you should be able to find one that specializes in your products. Also, although the very large trading companies mostly import and process bulk commodities like petroleum, they often have subsidiaries that specialize in, for example, computers or communications equipment.
When dealing with trading firms, you should be aware of a few things. First, a Japanese trading company will usually want to be the sole agent for your product for an extended time. This is understandable, because without such an agreement the company will be hesitant to devote resources to develop a market without exclusivity. Nevertheless, if you do grant exclusivity for a product, you should try to limit the exclusivity to a certain market segment where the trading firm is especially strong. For example, you may want to only give them a long-term exclusive contract for sales to the government, and make exclusivity in the private sector subject to annual review.
Finally, a trading company should never be chosen hastily. Although many trading firms are chosen after a single whirl-wind tour of Japan, firms should take more care in selecting a trading company. Making a second and even a third trip to Japan to select a distributor may seem like a waste of time and money, but it could easily repay itself by reducing problems in the future.