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Succeeding in Japan: Should I Do a Joint Venture?

This is the third article in our “Succeeding in Japan” series. Article one focused on Japan entry timing. Article two focused on Japanese business culture and IT purchasing idiosyncrasies that can make Japan entry challenging. This article will answer one of the most common questions we get: “should I do a JV or not?”

Introduction

Before the digital era, to meet Japan’s challenging business environment (described in our last article) foreign companies in many industries looked for local joint venture partners to provide support with hiring, access to markets, licenses, manufacturing and logistics. This mindset extended itself to the early days of the Internet as companies like Softbank aggressively sought to exploit technology arbitrage opportunities by securing exclusive rights from promising US startups and using their (Softbank’s) prodigious resources to launch these services in Japan usually via a joint venture. Yahoo! in particular as one of Softbank’s early and most high profile efforts was and continues to be a massive success with a business and brand in Japan that have long outlived its parent company in the US. This and a few other high profile successes aside, the utility of joint ventures has waned over the years as access to markets and local talent in Japan and access to capital in the US have significantly improved making it much more feasible to enter Japan alone than was previously the case. That is not to say that the JV is completely irrelevant. It certainly remains a viable option for some companies. Distributors and other channel partners are also important ecosystem players which must be carefully considered. Which strategy is best of course differs by industry and by company so in this article we present a framework for thinking through the different entry options as well as their respective pros and cons.

JV or 100% direct?

Let us start by saying unequivocally that for the vast majority of IT startups the best vehicle for Japan market entry is via a wholly owned local subsidiary. As alluded to in the introduction, the Japanese JV is primarily a relic of the pre-digital age when physical distribution did (and to a certain extent still does) present complexity and costs that set the bar for Japan entry too high for all but the most well funded companies. For purely digital companies that bar is and always has been much lower for obvious reasons. Even then the justification for JVs was for access to talent, markets and capital which indeed were all scarce in the early days of the internet. But today, the situation is very different. Capital in SV to fund overseas expansion is abundant. Also over the past 20 years, Japan’s IT industry has matured and evolved. The pool of talent that chose to forgo traditional lifetime employment with Japanese companies and instead work for tech startups has grown in both quantity and quality. Most importantly, the number of skilled country managers reached critical mass. While there is still a shortage of talented leaders as demand continues to outstrip supply, the pool of next generation up and coming sales leaders who understand how to run a proper GTM and have the ambition, skills and experience to make the leap to country manager also grows daily. So while winging it alone still is not a winning strategy, ceding ownership and control in the vast majority of cases is also no longer necessary.

But here is the primary reason we advocate for a model of full control:

Japan is too large and too strategic as a key Asian market to entrust or entangle with another party that by definition will have a different agenda from you. Yes, going it alone may be a bit more work on the front end, but it will be more than worth it to fully own your destiny, to have direct visibility into what is happening and not have to consult another party before making important decisions. Moreover, the process of hiring the country manager and directly integrating the Japan team with HQ, with no third party in between, will make your Japan team more connected and stronger. Finally, having key executives at HQ fully own their functional areas in Japan including hiring local leaders and working directly with them to implement your global strategy will make the company stronger, especially as you make a broader push into Asia and other international markets.

When JVs make sense

There are of course cases in which joint ventures absolutely do make sense including for companies that operate in highly regulated industries requiring difficult to obtain licenses (banking, pharmaceutical, medical, etc.) or for companies that sell primarily to government/military where relationships, licenses and institutional knowledge of the procurement process can make a JV the better entry vehicle. It goes without saying that if manufacturing, warehousing, shipping and/or maintenance of a physical product is a requirement locally in Japan then again the equation can shift in favor of a JV. In all cases though if you do in fact compete in an industry that falls into one of the categories above and you do determine that a JV is the preferred structure for Japan entry, it is important that you find a partner that actually has the necessary licenses, relationships, facilities and experience that your business requires. (Note: at Geodesic Capital, of the 20 companies we have supported in Japan over the last 5 years, we have one that has a JV and that JV sells exclusively to the government.)

Why JVs can seem so appealing

Many Japanese companies (small and large) are currently actively looking for JV opportunities in Silicon Valley. Some are companies that specialize in JVs and others are manufacturers, banks, insurance companies, ad agencies etc. that have ratcheted up the urgency to find US tech companies to partner with as part of a broader digital transformation strategy. The primary appeal to Silicon Valley companies to do a JV comes most often because potential JV partners approach them when they are not quite ready to go to Japan, and then convince them that the right timing for Japan entry is now. Doing a JV obviously would allow the company to pursue Japan sooner rather than wait and risk potentially missing the optimal window. This is a tempting offer to pursue and in fact could be the right one as each situation is different depending on who the company is and what they are offering. But, even if the timing and partner are right, doesn’t mean JV is the right vehicle.

Here are some things to consider before you make a decision:

• Due your own diligence on Japan to see if indeed the market is ready. (See the first article in this series for a detailed guide on how to determine this.)
• If you find that in fact the Japanese market is ready, consider doing it yourself. It’s a lot of work, yes, but doing a JV is no walk in the park either! Revisit your priorities and see if going to Japan shouldn’t be accelerated.
• If the JV suitor makes for a compelling partner, but you still would rather not do a JV, consider other options such as a limited exclusive partnership (for example if you are not planning on going to Japan for 18 months, offer this as an exclusive window for them to pursue on their own. Offering them an opportunity to invest in the company can further strengthen the relationship and align incentives as well.) Such arrangements often do not produce significant results. However, it can help land a few customers and build a brand so that when you are ready to formally launch you are not starting from zero.

Conclusion

Besides the JV and fully owned subsidiary, there are of course other Japan entry options such as licensing, M&A, distributor/reseller agreements and consulting partnerships — each has its respective positives and negatives to be sure. Regardless of the specific structure, though, assuming your goal is to establish a durable global enterprise, then the critical principle for success is ownership and control of your brand, your team and the customer experience. In Japan, where cultural/linguistic issues, geographic and time-zone separation already can obfuscate things, it is the process of hiring, negotiating and supporting customers that builds the foundation and tacit knowledge necessary for long-term success.

Up next

At Geodesic we have helped 13 portfolio companies launch in Japan (including 1 joint venture). As an investor, we act as a guide helping to and to think through the nuanced issues above for each company. Once the entry structure is determined, the GTM strategy and execution come next including functional entry best practices for sales, marketing, partnerships, product, legal, HR and customer success. We will cover each of these areas in the next article and discuss how to align them all around a focused entry strategy to maximize the probability of success.

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I’m Marcus Otsuji of Geodesic Japan. My team and I in Tokyo help Geodesic Captial portfolio companies to develop and execute winning strategies as they enter and compete in Japan. If you’re thinking about Japan and would like to chat, send us a note via LinkedIn!