Franchising with Direct Marketing---Doing Business in Japan
Selling to the Japan Government--Doing Business in JapanJoint Ventures/Licensing in Japan--Doning business in Japan
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2008/01/15 17:29 | by SamChan ]
2008/01/15 17:29 | by SamChan ]
Joint Ventures/Licensing
U.S. companies with limited resources or a short investment horizon may wish to consider product licensing as a way to enter Japan. The direct costs of finding an appropriate licensee are small compared to other forms of market entry. Once an agreement is reached, licensing fees and royalties are low-cost, low-maintenance income for the U.S. company.However, U.S. companies should note that licensing represents a minimal form of participation in the Japanese market. Whether a company should license its technology depends upon several factors.
First, a U.S. company should consider its long-term plans for the Japanese and other Asian markets. Licensing necessarily means a loss of control over market strategy, and perhaps “opportunity costs.”
Second, U.S. licensors should understand the strength of their company’s patent protection in Japan. Japan uses a “first to file” patent system, and this has ominous implications should a licensee explore becoming a competitor. And this does happen.
Finally, the degree to which U.S. firms must disclose trade secrets or proprietary information is a key consideration.
A Japanese licensee’s interest or enthusiasm for a U.S. technology is a direct reflection of the licensee’s assessment of the product’s competitiveness and sales expectations in a technologically sophisticated market. Thus, a U.S. company’s long-term interest might lie in another form of market entry, even if it carries higher costs and longer payback periods.
A licensor also sacrifices potential returns from manufacturing and marketing efficiencies. While Japan is a high-cost country for marketing, it is also a large market over which to spread the costs of marketing, even for relatively specialized technology. So, even after adapting a product for the Japanese market, U.S. manufacturers may realize better profit margins and market penetration by selling their own product, as opposed to through a licensee.
Harder to quantify are the costs of managing or in some instances “policing” the licensing agreement. In the worst cases, a licensee will improve upon or modify the U.S. product or technology, patent it as its own, and become a competitor in Japan, the United States, or other countries.
It is also possible that the Japanese licensee could falsify sales reports in order to lower its royalties to the U.S. company. The final drawback of licensing is that it provides the U.S. company with very little information or practical experience in the market. The Japanese market is highly demanding and, ultimately, it’s important for a U.S. exporter to have direct experience in order to expand its presence. Japan is also a very good, though demanding, training ground. U.S. firms can apply the lessons learned here to other markets, as well as improve their product or technology through direct contact with the market.
The pitfalls mentioned above account for the declining popularity of licensing in some industries. However, it may still be the best choice for products with short life cycles and where short-term income generation is desirable. Licensing also makes business sense in industry sectors where market entry costs are prohibitive or where there are political sensitivities (such as defense-related equipment).
The key to a successful licensing agreement is a Japanese partner whose goals match those of the U.S. company. A strong licensee will have something to bring to the partnership as well. For example, the ideal license agreement might provide for an exchange of technology and know-how to strengthen both partners. It is essential that the U.S. licensor maintain close and frequent contact with the licensee, which should include regular visits to Japan. A local representative, other than the licensee, can provide additional perspective on the market and can help represent the licensor to the licensee. Royalties paid by the Japanese licensee to the U.S. licensor are subject to a 20 percent withholding tax, which may be reduced to 10 percent if the necessary documentation is filed under the provisions of U.S.-Japan tax treaties.
According to Japan’s Foreign Exchange and Foreign Trade Control Law, a foreign company granting a license to an independent Japanese corporation, either a wholly-owned subsidiary or a joint venture corporation that involves manufacturing in Japan, must notify the Ministry of Finance through the Bank of Japan in cases involving the transfer of specially regulated and/or designated technologies.
Additionally, the export of any form of technical data from the United States is subject to U.S. export control laws. In this case, a thorough review of the U.S. Department of Commerce’s Export Administration Regulations (EAR) should precede the signing of any licensing agreement. To learn more about the EAR, please visit the following web sites:
Bureau of Industry and Security www.bis.doc.gov/PoliciesAn...
Government Printing Office www.access.gpo.gov/bis/ind....
Joint ventures remain a popular form of selling to Japan. Advantages include access to local market information and conditions, a stronger market presence, technology development, and gaining immediate access to a distribution system and customers. Most joint ventures take the form of a separate or third company established between a U.S. and Japanese company, with a range of agreements covering shared functions, personnel, management, and ownership. In most cases, the Japanese partner has control over marketing and distribution functions. U.S. companies should be prepared to share ownership, control, and of course profits, with their Japanese joint-venture partner, and therefore issues of communication, trust, and common business interest are crucial.
Joint-venture partnerships that involve technology transfers or license agreements with Japanese partners have the same pitfalls as license agreements. The value of the joint venture may diminish as either party becomes less dependent on the other’s marketing prowess, customer base, or technological innovations. U.S. companies should also understand that many large trading companies have a large “ready-made” pool of existing customer relationships. This produces a rapid increase in initial sales, but once its share of the market is tapped, the Japanese partner often has little interest in prospecting for new customers, unless the product has extraordinary technological or price advantages. U.S. firms should take the same precautions about divulging proprietary know-how in a joint venture as with license agreements.
A joint venture in Japan can be an unincorporated, contractual joint venture, or an entity created by the acquisition of the stock of an existing corporation. More typically, a joint venture is the incorporation either in the United States (but more commonly in Japan), of a new company in which the Japanese and U.S. corporation mutually decide upon management control and the roles and responsibilities of each party. The Ministry of Finance (through the Bank of Japan) must be notified of the establishment of any joint venture. In addition, if the joint venture is intended to last more than one year, the joint venture agreement must be submitted to the Japanese Fair Trade Commission for review within thirty days of its execution.
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