Going Through Customs
Amar Bose is a man unaccustomed to failure. Designer of a unique audio speaker system that stood the stereo world on its head, he has spent two decades building his Framingham, Mass.-based Bose Corp. into a model of American entrepreneurship and innovation, with sales last year exceeding $85 million.
But when Bose turned his considerable energies toward Japan, the results were anything but impressive. Despite a strong marketing push and a deal with a major Japanese distributor, Bose failed even to dent the Japanese audio market. From 1970 to '73, for instance, the company sold fewer than 100 pairs of speakers.
"It was frustrating," the lean, graying Bose recalls with a pained expression. "I was convinced we had a superior product, and we knew the Japanese liked the quality. But nothing seemed to work. It got so absurd that I was embarrassed even to be in Japan. Our image was destroyed. There was nothing to do but pull out."
Such close encounters of the wrong kind have been all too common among American businesses trying to break into Japan. Looking for an explanation, many American companies and political leaders find a convincing bogeyman in the Japanese government's industrial policy, with its high tariffs, quotas, government-sponsored cartels, and seemingly arbitrary health and safety regulations. Others point to the insidious -- and very private -- collusion among Japanese businessmen designed to keep American companies on the outside looking in.
Clearly, these are difficult hurdles to overcome (see sidebar, page 183). Yet to focus on them is to miss the key point about doing business in Japan. Whether you are selling speakers or shampoo, terminals or trucks, you can succeed if you know the rules.
"It's so easy to make excuses for failure," says Bose. "Some like to say it's the government or cheap labor, but fundamentally, it's a question of understanding the people and the market. You have to understand the way Japanese think."
Japanese business, after all, is not like Japanese baseball, which is played much the same way in Tokyo's Korakuen Stadium as it is in Yankee Stadium or Wrigley Field. To compete, American businesses must get used to a completely different ball game, with a rule book that may seem nothing short of bizarre. But the prize -- a share of Japan's $126-billion import market -- should make the extra effort seem worth while.
RULE #1: FIND THE RIGHT PARTNERS AND MAKE THEM YOUR FRIENDS
Looking back at his company's experience in the early 1970s, Amar Bose identifies the key problem as the failure of his marketing people to establish close personal ties with their distributors. Japan is an intensely relationship-oriented -- not transaction-oriented -- society, and personal connections are the very essence of doing business nihon-shiki, or Japanese-style. Yet Bose's export sales staff never spent the necessary time, face-to-face, to convince its Japanese distributor of the advantages of Bose's unique direct/reflecting audio technology.
In fact, the Japanese were so unconvinced by the Bose system -- which bounces most of the sound waves off walls instead of spending them directly toward the listener -- that the distributors removed one of its essential components, producing a sound quality that Bose, an internationally recognized expert on acoustice theory, describes as "simply terrible."
"It was idiocy," he says. "Our marketing guy -- a graduate of the Sloan School of Management [at Massachusetts Institute of Technology] -- figured all we needed was to get the product out, and it would sell itself. Well, it didn't. There was no training, no communication, no nothing."
Lack of communication is bad for any business relationship, but it can be particularly devastating if you are trying to crack the complex Japanese distribution system. Japan, with an economy and population roughly half the size of ours, has more wholesalers and retail outlets than the United States -- a vast web of vendors ranging from large wholesalers in the major cities to tiny sub-sub distributors spread throughout the 1,000-mile length of the four main islands. This bewildering network is held together by friendships, school connections, and family relationships. And its members, as Bose discovered, frequently value personal relations -- often cemented during late-night drinking bouts -- above mere transactional considerations of technical superiority or price.
"Japanese suppliers and distributors absolutely discriminate," says Richard Adler, president of Corton Trading Co., a high-technology import-export company based in Tokyo. "If an American company has the only whoopty-do in the world, they can sell it. But when I went to Sony with a rectifier, they said they had rectifiers from their old suppliers in Japan. They didn't really care if the American ones were better or cheaper. It often boils down to the old friend who went to school with you or grew up with you in Osaka."
These loyalties can provide a convenient excuse for some distributors to take advantage of the purely transaction-oriented foreigner. J. Hutcheson Page, an American trade consultant based in Tokyo for more than 30 years, tells the story of a small, overeager American computer manufacturer that rushed into a deal with an Osaka-based Japanese distributor. The distributor turned out to be in cahoots with a local manufacturer, which brought out a remarkably similar machine eight months later, essentially forcing the American company out of the Japanese market. "Finding someone you can trust with your product is a very key decision," warns Page. "You have to get to know your partners or have someone do homework on them. Don't rely on telexes."
Once you do find the right partners, you need to make them feel at home -- any way you can. "The first thing you do when you make a deal with the Japanese," suggests Bob Berglass with a whimsical smile, "is buy a flag." Berglass -- the president of DEP Corp., a $19-million-a-year Los Angeles manufacturer of hair and skin-care products -- scoots across his office and returns with a large Rising Sun under his arm. "When my partners come, I unfurl this thing, and we've opened up 'Japan DEP," he says, holding up the flag. "It relaxes everyone. It seems so silly, but the meaning is there. We are in this together."
On the surface, Berglass's Japanese colleagues are no different from those wholesalers/distributors that have mistreated American clients. But where a poor relationship with a distributor can lead to disaster, a good one -- such as DEP's with Ida Ryogokudo Co. -- can open doors all over Japan.
Founded in 1918, Ida Ryogokudo has spent 66 years expanding its network of cosmetics distributors. Some distributors for Ida -- which last year enjoyed sales of more than $92 million -- are direct descendents of those who started with the company's founder, Kohachiro Ida, and are bound to the company in intensely personal ways. "The loyalty of our customers and distributors to our company is very strong," says executive vice-president Hitoyuki Ida, older son of current company president Hideo Ida and grandson of the founder. "This is a personal commitment to our father and grandfather. That is a very vital commodity in our opinion."
At first, the Idas decided to offer that "commodity" to DEP because they were drawn to the American company's line of youth-oriented hairstyling products, shampoos, and conditioners. But what made the partnership blossom, the Idas believe, was the importance Berglass placed on developing a close, personal relationship instead of keeping things strictly business.
For instance, Berglass suggested that the Japanese DEP representatives meet with him on a quarterly basis -- once a year in Tokyo, twice at DEP's headquarters, and once at a resort hotel in Hawaii. "The phone is fine, but it is face-to-face that makes all the difference," Berglass says. "What we have wanted to achieve with them is the understanding that this company will do what we say and that we care what they do. That way, no one wants to break the chain of obligation."
Berglass's faith in this chain of obligation -- what the Japanese call giri -- leads him to do many things the average American businessperson might consider a waste of time. For example, when Takao Ida, Hitoyuki's younger brother and director of Ida's international division, first came to America to learn about DEP, Berglass insisted that he stay at his house in Marina del Rey, sharing the family dinner table and even household chores. Today, Berglass considers himself young Ida's "American father."
"When we meet in Hawaii, we talk business one day, lie out on the beach the other, do a lot of drinking and fun. It's beautiful human communication," Hitoyuki Ida explains. "You see, we really like them, so we make every effort to help them. And it's not always the ideas you come up with at the meeting or on an agenda. Sometimes a sake party is the most important thing."
RULE #2: MARKET TO JAPANESE TASTES, NOT YOUR OWN
If it had just been a matter of normal business relations with a gai-jin (foreigner), the Idas might have been content simply to distribute DEP's products. But as friends and "family," they felt obligated to help tailor DEP's Japanese marketing campaign.
"At first we tried to give them what's happening in America and what they should do. I'm sure we drove them crazy with this," Berglass recalls. "But they convinced me that the final vote belongs to them. It's their market, they know what they have to do. We can't Americanize them to the point of screwing up their marketing. After all, their system works for them."
Berglass admits it wasn't easy to accept the strategies laid out by the Idas. A former Faberge Inc. executive with 25 years of cosmetic-marketing experience, Berglass had pushed DEP products successfully through a wide range of outlets in the United States, including high-price drugstores, supermarkets, and discount houses. But the Idas insisted that in Japan, DEP should target not the mass market, but only a select, fashion-oriented segment.
This approach was dictated, in large part, by prices. A nineounce tub of DEP hair-styling gel sells for $2 in the United States, but the same gel -- due to higher distribution costs, shipping, and the need for special batching of Japan-bound products to comply with Japanese health regulations -- costs more than twice as much in Japan.
To justify the high prices, the Idas set out to give DEP an elite image. They insisted on introducing the product only at such high-status locations at the Mitsukoshi, Sony Plaza, Isetan, and Seibu department stores, ignoring the tempting sales volumes offered by Japan's increasingly important discount houses.
"We wanted the opinion leaders first," explains Takao Ida. "Then we could get early adapters in the outlying areas and eventually the late adapters.The key was to make a success story with the top echelons and expand gradually. In a year and a half, the people in Hokkaido would decide that DEP was the 'in' thing in the big city."
Even after DEP had been accepted by the first-class department stores, the Idas flatly prohibited sales of DEP products to the discount outlets. This violated Berglass's American marketing instincts, but the Idas persuaded him by sending him on a tour of 26 of DEP's Tokyo outlets in one day.After speaking with the people who actually sold his product, Berglass quickly realized that selling through discounters would have destroyed DEP's carefully crafted high-cost, high-status image.
"It was hard to understand, but they sure gave us an education," Berglass recalls. "In the U.S., we actually promote discounting. If you can buy Bayer aspirin at a lower price, it's just a good value buy. But in Japan, a lower price of Bayer -- or DEP -- implies there's something wrong with it."
The wisdom of the Ida's strategy soon proved itself. Shortly after DEP's hair-styling gel hit the department stores, some 15 domestic competitors entered the fray with various me-too products. But instead of falling, DEP's Japanese sales soared from $923,000 to $4.2 million in four years -- nearly 7% of the corporation's worldwide sales. The Japanese competitors, meanwhile, failed miserably.
"We ruined them," boasts Takao Ida. "The imitators of DEP did not have our image. They couldn't get into places like Seibu. We made DEP a product with a high-class, sexy, California image, which has a very strong impact on Japanese young people. The others couldn't imitate that."
RULE #3: KEEP YOUR EYE ON THE LONG RUN
"Doing business with the Japanese," one American executive complained over coffee in Tokyo, "is like watching a tree grow." Despite the oft-repeated cliches about the efficiency of Japanese management, Japanese organizations often move at a pace that gives new meaning to the old phrase "in the fullness of time."
Take the case of Vahe Karapetian and his AA Cater Truck Manufacturing Co., in Los Angeles. A trade mission from Japan first visited his Los Angeles assembly line in 1978. "I couldn't figure out what they were doing here," Karapetian recalls, his words thick with the accent of his native Soviet Amenia. "They kept asking so many questions that I wondered if they wanted to buy a truck or build some themselves."
Among the men in the trade group was a representative of Nichimen Corp., a giant Tokyo-based trading company with sales last year of $13 billion. The Nichimen representative left his card, but beyond an occasional telephone call, nothing much happened.Karapetian just bided his time, hoping for, but not expecting, a break.
But while Karapetian waited, Nichimen was discussing AA Cater with a major client, General Mission Co., a leading Japanese vending-machine company. Ever since he saw his first catering truck on a business trip to Los Angeles in 1973, General Mission president Tadashi Yoshino had dreamed of bringing this kind of mobile fast-food business to Japan. Yoshino was convinced that major changes in the traditional Japanese lifestyle -- caused by such phenomena as increased leisure time and the spread of industrial locations further from urban centers -- would create a great long-run demand for fast, efficient catering services.
Yoshino had a problem, however. No one in Japan made catering trucks, and none of the major companies seemed interested in branching into such a small market niche. Going abroad didn't look like a feasible solution, either. Strict Japanese government regulations -- requiring a manufacturer to make as many as 50 modifications -- presented seemingly impossible obstacles to potential foreign suppliers. "We couldn't see the typical American who would put in the time for such a business," Yoshino explans. "I figured most are so short-run oriented, they'd never go along with it."
But Vahe Karepetian was not like Yoshino's typical American. In the Soviet Union, standing in line for even the barest essentials, he had learned patience. Eager to move to America since boyhood, he spent years negotiating an exist visa for his family, finally arriving in Los Angeles in July of 1968. Karepetian, an electromechanical engineer by training, also showed remarkable patience in building his business. He launched AA Cater on a shoestring in 1970, custom-building the trucks on General Motors chassis in his backyard. Today the company boasts annual sales of more than $8 million and builds some 250 trucks a year on a 2.5-acre lot in south central Los Angeles.
It was Karepetian's willingness to take a long-run approach that led him to accept General Mission's first order in 1981, nearly three years after the initial contact by the Japanese group. On the surface, the deal -- for a single catering truck -- hardly looked worth the wait. For one thing, just to meet the specifications of the Japanese government -- and those made necessary by Japanese cuisine -- Karepetian had to add and even invent numerous new features, changing everything from the shape of the sinks to the size of the water heater. He even added freshwater tanks and hand sinks so that patrons could wash their hands.
"When I saw that first truck leave, I wondered if it would be the last or if I'd see 100 just like it coming this way the next year," Karepetian says. "But then again, the only way you ever make customers is to try it out. You make $10 now to make $100 later. General Mission seemed sincere about this catering business in Japan, and I was willing to take a chance that we could build it with them."
Impressed with Karepetian's attention to detail and willingness to customize his product, General Mission returned each of the following three years with orders for 10 trucks. (Nichimen continued to facilitate the sales, arranging shipping, letters of credit, and so on.) Now rapidly expanding its truck catering business, General Mission has plans to order a still larger number of trucks from AA Cater -- despite belated attempts by such giant Japanese companies as Isuzu Motors, Mazda Motors, and Toyota Motor Sales to woo it from its tiny American supplier.
"We want to stay with Mr. Karepetian because we respect and we believe in him," Yoshino explains. "He is flexible and patient, willing to do the modifications we ask, no matter how difficult. He has been patient and has given us a quality product. As far as I am concerned, he is now part of our marketing strategy."
RULE #4: IF YOU PUT A SUBSIDIARY IN JAPAN, RUNIT LIKE A JAPANESE COMPANY
For a small company like AA Cater -- or one that makes a relatively simple product, as DEP does -- cultivating the right distributor can be a highly efficient and profitable method of cracking the Japanese market. But when dealing with expensive and technically complex items requiring constant service -- such as audio equipment or high-tech electronic gear -- companies often find it best to develop their own Japanese operations.
After his disastrous first foray into Japan, for instance, Amar Bose was determined not to trust his product to outside distributors."If you have a technology that's advanced, that has different controversial features from conventional products, you need to provide a great deal of explanation and service to your customers," he maintains. "To do that, you need to go direct, to control your own fate."
So when Bose decided to reenter the Japanese market in 1975, he chose to do it through a company-owned branch, which eventually became a wholly-owned subsidiary. But opening a sales office in Japan didn't solve his problems. For one thing, Bose's Japan manager, an American citizen born in Korea, proved little better at nihon-shiki than his MIT-trained predecessor. Indeed, recalls one Bose executive, even though the new manager spoke fluent Japanese, he still was considered a foreigner, and seemed incapable of understanding the subtle nuances of Japanese business relations. After one meeting with dealers in Kyushu, for instance, he was convinced that he would get a large order, and came back to Tokyo boasting about it. When only a small order came in, he was crushed -- and lost face with the other employees.
"He simply didn't understand the diplomacy of Japanese business," says the Bose executive. "He couldn't understand that an expression of interest in a product by a Japanese sometimes means only a lukewarm interest.Maybe in the long run there would be business, but not right away. He just didn't understand."
By 1980, five years after the Tokyo office opened, Japanese sales were still running at under $300,000 a year, hardly enough to cover expenses. Growing desperate, Bose went back to Japan to search for ways to save his failing operation. He asked his accountants, Price Waterhouse, to start looking for a new head of Bose Asia Ltd., Japan Branch. But most qualified candidates seemed unwilling to leave their current jobs, particularly for a troubled subsidiary of a foreign manufacturer.
Meanwhile, a friend from a Japanese audio magazine suggested a possible candidate for sales manager. After meeting the candidate, Bose met with his former employer, a Japanese import/ export entrepreneur named Sumi Sakura. From the moment Bose met Sakura, he knew this was the top man he had been looking for. He offered Sakura a job on the spot, but Sakura declined, saying he was too busy with his own business.
But Bose persisted (see Rule #3). He made a point of staying in touch with Sakura, even inviting him to Framingham to attend an international sales meeting. Then, shortly after that meeting, Bose learned that his manager in Japan had been falsifying his expense reports. Bose fired him immediately and called Sakura, who -- although still engaged in his own business -- went over that same morning and took command of the crumbling Japanese operation. Within two months, Sakura gave up his own company and began working full time for Bose. Within four years, he had boosted Bose's Japanese sales to roughly $16 million.
Upon taking the helm, Sakura promptly set out to "Japanize" Bose's Tokyo operation, following a strategy such companies as IBM Corp. and Texas Instruments Inc. have used with great success in Japan. "You have to establish a corporate role for the subsidiary, a strong mission," says Masanobu Kawaminami, a former controller at Texas Instruments in Japan and, since 1982, president of the highly successful Data I/O Corp. subsidiary in Tokyo. "Japanese are motivated by other things than Americans are. Our company works here because Data I/O Japan is a Japanese company."
Given virtual autonomy by Bose, Sakura restructured the operation along strictly Japanese lines. He insisted, for instance, that the salary structure for employees be laid out nihon-shiki -- with everyone getting an incentive bonus each year. In his singleminded quest to build a Japanese team spirit, he required that top managers, himself included, help with such chores as unpacking merchandise. And he refused to hire people with previous experience working for foreign corporations.
"I wanted the company to follow my pattern, to live and breathe like a Japanese company," he explains. "I got the employees together and said, 'Here is our goal -- to take 20% of the foreign speaker market.' They had to understand me. You know, a Japanese company is like a human body.The things your brain considers may not reach your body. The key is to make every part feel a share of the operation."
Religiously observing Rule #1, Sakura worked tirelessly to develop close relations with distributors and dealers. Unlike his American predecessors he placed great emphasis on traveling around the country -- sometimes accompanied by Bose himself -- in order to bolster these ties.
At the same time, following Rule #2, he sought to Japanize Bose's marketing strategy. Past efforts had focused on the large consumer market, but Sakura turned his attention to professional musicians and such commercial customers as owners of bars and restaurants. By getting these early adapters to accept Bose products, Sakura hoped to position the company as the elite brand among Japanese trendsetters -- much as the Idas did with DEP.
"In Japan, you want to make it seem like your product is for the professional user," Sakura explains. "If you sell a camera, you want it to be to a professional photographer. Then the average consumer will want it. That's how Japanese consumers think."
Sakura's personal contact with dealers and customers even led him to suggest some changes in the product itself. One line of speakers, for instance -- popular in the United States and other countries -- was selling only 40 pairs a month. The reason: Many potential buyers simply didn't like the speakers' walnut casings. "They were too conservative for the Japanese, too New England," Sakura says."Japanese consumers for this product are younger than in the U.S., they like sharper lines." So Sakura asked Bose if the factory could do a special run of speakers with a black exterior.
At first, the idea horrified the folks in Masschusetts, who thought the walnut casings the essence of elegance and teste. But Amar Bose, after all his problems in Japan, was now determined to do his business there nihon-shiki. If black speakers were what the Japanese consumers wanted, black speakers were what Bose would provide. And today, with sales of the speakers now running at 1,200 pairs monthly, even the most skeptical people at the Framingham factory are happy to play along.
"When the orders for the black speakers come in, everyone still says 'Ugh," admits G. Stewart Renner, a Bose manufacturing engineer, as he watches workers pack speakers into boxes. "But as long as Sumi sells a lot of them, we'll keep making them. You can't argue with success."