V. MARKETING U.S. PRODUCTS AND SERVICES Marketing U.S. products and services is discussed in detail in the Japan Export Guide "Destination Japan: A Business Guide for the 90's (Second Edition)" prepared by the U.S. Department of Commerce and contained in the National Trade Data Bank. This section is adapted and abridged from "Destination Japan." A. Distribution and Sales Channels 1. Consumer Goods Distribution channels in Japan of imported consumer goods are characterized by close, personal relationships between importers, multiple layers of wholesalers, and retailers. Imported consumer goods are most often sold at larger stores, including department stores and discount houses. While half of Japan's consumer purchases are made at neighborhood "mom and pop" stores with five or fewer employees, these stores rarely carry imported goods. Many of these stores cannot secure credit by themselves and have insufficient space to maintain large inventories. They often have financial, ownership, or exclusive arrangements with major Japanese manufacturers, industrial groupings (keiretsu), or trading companies and are served by three or more wholesalers, who provide the small retailers with market information as well as financial support. The problems with entering Japan's distribution system are also partly cultural in nature. Many Japanese wholesalers and retailers are hesitant to disrupt their longstanding relationships with Japanese suppliers even when a U.S. supplier can offer a superior product at a lower price. While the retailer or wholesaler may fear anger or threats of retaliation from their existing Japanese suppliers, they may also fear that the U.S. supplier will not make timely shipments or have systems to handle after-sales service. These fears and doubts stem in part from a traditional lack of willingness to do business with strangers. That is why a presence in Japan and a commitment to develop relationships with Japanese businesspeople are so important. As Japan's small shopkeepers age, the number of small shops is declining. Small shops are also under financial pressure as the keiretsu alignments are slowly weakening and as recent amendments to Japan's Large Scale Retail Store Law have eased restrictions on opening new large retail stores (supermarkets, chain stores, etc.) and on their business hours. The emergence and growth of self-service discount stores and "superstores" is also helping to reduce the layers in the distribution system and make imported goods more price competitive. 2. Capital Goods Direct sales are more common for expensive, high-tech equipment. In some capital goods sectors, Japan has a number of small firms which function as subcontractors for larger manufacturers. Small and medium-sized firms supply the majority of manufacturing industries with most of their products. To sell to these firms, it is often necessary to work through several layers of wholesalers and develop relationships with product engineers and designers. B. Use of Agents/Distributors; Finding a Partner 1. Use of Agents Establishing a presence in Japan is the best way to penetrate the Japanese market. Even with a representative office or a sales office in Japan, however, unless a U.S. company is prepared to start a distribution network in Japan from scratch (as Coca-Cola Corporation did), or is in the direct marketing field, it will be necessary to find distributor(s). If a U.S. company does not have a sales office in Japan either, it will generally be necessary to find an agent as well. Distributors in Japan usually cover a specific territory or industry. Import agents are usually appointed as sole agents for the entire country. While that may be necessary to ensure a strong commitment by the Japanese agent towards expanding sales, a U.S. company should not be pressured into granting an exclusive agency if there is doubt as to the ability or willingness of the Japanese company to expand sales of the product. A limited term of representation, minimum sales, or qualitative indicators of sales efforts, may be appropriate in exclusive agency contracts. While the Japanese Fair Trade Commission has guidelines applicable to exclusive agency contracts, there are no statutory damages required upon termination of an agency contract. However, replacing a Japanese agent or distributor can be difficult if done abruptly. 2. Finding a Partner A U.S. company should be as selective in choosing a Japanese business partner as Japanese companies are in choosing a new American supplier. This takes time, requires credit checks of the Japanese company's financial and industry standing, existing relations with Japanese competitors, and requires two-way trust. The Japanese party's willingness and ability to abide by contract terms is crucial. A U.S. company should not expect to obtain the strong enforcement of a contract in a Japanese court that it might obtain from a U.S. court. Part of the difficulty in choosing a Japanese agent is assuring that they will devote serious attention to expanding the market share of the U.S. product. A U.S. company should avoid the representative or distributor that targets limited, high-price niches, whether in industrial or consumer products, is compromised by strong ties to a Japanese "keiretsu" manufacturer, and which fails to compete directly with established Japanese products and give U.S. exporters volume sales. To attract a Japanese business partner, a U.S. exporter must present an image of company dependability, demonstrate innovation, superior quality of product and packaging, price competitiveness, and long-term commitment to the market, and be prepared to build personal relationships with potential business partners. A U.S. company should be well regarded in its industry in the United States, show in its preliminary contacts with a Japanese company that it has researched the market, prepare a high quality brochure in Japanese on the company and its products, and promptly respond to all inquiries from Japan in a professional and timely fashion. This will help overcome Japanese companies' reluctance to do business with a new foreign supplier. In order to build a personal relationship with a Japanese import agent or distributor -- before or after an agreement is signed, frequent, even daily, communication by fax or phone is crucial and regular visits to Japan are a must. Often, the most critical business decisions will not be made at the conference table at the first meeting, but in the evening in informal settings. Finding the appropriate Japanese partner is a challenge. A common mistake made by many U.S. firms is to try to use a list of importers as a means of first contact. Fax machine or correspondence inquiries will not work in Japan. The Japanese prefer to do business with someone only when they have been properly introduced and meet face-to-face. The "go-between" serves to vouch for the reliability of both parties. This will help dispel reluctance on the Japanese side. Appropriate third parties can be other Japanese firms, U.S. companies that have successfully done business in Japan, banks, trade associations, chambers of commerce, the U.S. Department of Commerce (through the Agent/Distributor Service), U.S. state representative offices in Japan, JETRO, or even Japanese government ministries. C. Franchising The franchising industry has become a multibillion dollar business in Japan. Originally developed in the fast food area, it has expanded into a variety of new sectors. U.S. participation in the Japanese franchising industry is highly visible under familiar names such as McDonald's, Kentucky Fried Chicken, Mr. Donuts, Subway Sandwiches, Denny's, and Sizzler among others. Because successful franchises tend to depend heavily on the long-term investment capability and marketing expertise of a Japanese partner, most U.S. franchisors usually do not try to recruit actual shop operators in Japan directly from the United States. Instead, U.S. firms concentrate their efforts on finding a master franchisee, which is usually either a Japanese company or a joint venture between the U.S. franchisor and a Japanese company. In some cases, it may even be a wholly-owned subsidiary of the U.S. company. The master franchise holder is then responsible for the actual recruitment of Japanese franchisees. Usually, the master franchisee will provide to the U.S. company a lump-sum payment, payable over a certain period of time, in addition to royalty payments which range from around 1 to 5 percent of the sales. Of course, the more assistance the U.S. company can provide, such as point-of-sale (POS) systems, the higher the percentage. Special attention should be paid to expectation levels of both parties to avert future problems. Terms should be formalized for contractual rights and responsibilities, trade mark protection, and marketing methods. D. Direct Marketing Direct marketing, including door-to-door sales, multi-level marketing, mail order and telemarketing, is becoming accepted as an alternative sales channel for suppliers attempting to reach the increasingly affluent Japanese consumer, while bypassing the traditional distribution channels. U.S.-based door-to-door and multilevel sales companies such as Amway, Avon, Nuskin and Tupperware enjoying substantial sales of cosmetics, detergents, cleaning supplies, and other home and kitchen items. Moreover, the demand for shopping through the mail or by telephone has grown tremendously in Japan in recent years. Many successful catalog sales and telemarketing companies in Japan are well-known retailers, manufacturers, wholesalers, newspaper and magazine publishers, broadcasting stations, advertising agencies, banks, credit card issuers, and finance companies. The Japanese customer demands top quality for every product and is meticulous about the packaging and condition of the package on arrival. Returns and claims are common. Direct marketing should not be considered a perfect escape from the Japanese distribution system and expectations of customer service. Without a well-established and well-recognized market position, it is unrealistic for a U.S. company to expect to buy a mailing list, send an English-language catalog directly from the United States to individual Japanese customers, and be inundated with orders. U.S. companies aiming to enter this market should at least be prepared to make an investment in service functions -- a representative in Japan can act as a liaison with the U.S. supplier to handle receipt of claims, customs clearance, public relations, and the preparation of a Japanese-language catalog. Warehousing and delivery can also be managed by the representative. E. Joint Ventures/Licensing 1. Licensing Licensing product technology is an alternative with considerable appeal. A firm can immediately contribute to its bottom line with little investment or direct cost. What is often overlooked, however, are the missed opportunities and the indirect costs of licensing. Licensing is a very limited form of market participation. High potential returns from marketing and manufacturing efficiencies are lost, and very little market information is gained. Often licensing agreements prove to be short-lived as the Japanese licensee improves upon the American product or technology and then exports the improved product back to the United States -- thereby becoming a major competitor. Indirect costs of managing and policing the licensing agreement are also often overlooked. There are many cases of licensees under-reporting sales and under-remitting royalty payments. The wisdom of licensing technology depends on the status of a company's patents in Japan, together with the degree to which the company must disclose trade secrets to its licensee. Licensing as a route of market entry into Japan has become increasingly unpopular with American companies in certain industries. The key to success in a licensing agreement is to have a partner whose goals coincide with those of the U.S. company. The contract should provide for a cross-technology exchange between licensor and licensee. The U.S. company should maintain close contact with the licensee and keep current on the Japanese market by visiting Japan regularly. 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 U.S.- Japan Tax Treaty. According to the Foreign Exchange and Foreign Trade Control Law, foreign companies wishing to grant a license to an independent Japanese corporation, its own wholly-owned subsidiary, or joint venture corporation, in order to manufacture in Japan must notify the Ministry of Finance through the Bank of Japan within 15 days of the execution of the licensing agreement. However, notification must be made in advance of the execution of the licensing agreement in those cases involving the transfer of specially regulated and/or designated technologies, in which case a report must be filed with the Ministry of Finance and other appropriate Japanese ministries. Special restrictions apply to designated technologies. In addition, if the license agreement is exclusive, extends beyond one year, and the licensee is a competitor with a 10 percent or greater market share and/or is ranked third or higher in the respective Japanese industry, notification must also be given to the Japanese Fair Trade Commission (JFTC). 2. Joint Ventures The advantages of establishing a joint venture in Japan are greater ease in identifying and hiring local personnel and securing immediate access to a distribution system and customers. This entry vehicle will however require a U.S. company to share profits and control with its Japanese partner. As with selecting agents, distributors or licensees in Japan, trust, communication and common interests with the Japanese partner are crucial. Joint venture partnerships involving technology transfer or license agreements with a Japanese joint venture partner have the same pitfalls as a straight license. The value of a joint venture arrangement may diminish as the Japanese partner improves on or becomes less dependent on the technological innovations the U.S. company developed. Exporting American-made products, as opposed to joint ventures that manufacture in Japan, helps reduce the risk of releasing proprietary know-how which gives the U.S. company competitive edge. It is possible to set up a joint venture in Japan through an unincorporated, contractual joint venture; acquiring stock by consent of an existing corporation; or through the incorporation either in the United States, or more commonly in Japan, of a new company in which the Japanese and U.S. corporations 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. 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 30 days after its execution. F. Steps to Establishing an Office Establishing an office in Japan can prove to be an expensive proposition primarily because office space in Tokyo and Osaka are the costliest in the world (Tokyo is 3.4 times as much in New York) and salaries for Japanese nationals are high. Detailed information on the mechanics of setting up and maintaining an office in Japan can be found in the many publications of the American Chamber of Commerce in Japan and other sources listed in "Destination Japan." This section summarizes the formalities for setting up four types of offices. 1. Representative Office A U.S. company that wishes to collect information or to facilitate contacts in Japan should consider establishing a liaison or representative office. This liaison office could be used to obtain market data, provide information to potential clients, and develop relationships with key elements in the distribution system to provide the necessary promotional and service support. A representative office is not subject to Japanese taxes and it is not necessary to obtain special approval from the Japanese government to be established. However, a representative office must not involve itself in commercial transactions (as defined in the Japanese Commercial Code) or generate income, therefore it can not handle orders directly. The liaison office may function by providing guidance and support to an agent, and managing all marketing activities except for the formal sale. 2. Branch Office A branch office of a U.S. company can engage in trading, manufacturing, retailing, services, or other business. A branch office may take and fill orders and carry out a full marketing program, including arranging for advertising, recruiting a sales force, and performing all necessary promotional activities. A branch is liable for payment of Japanese taxes. The branch must appoint a resident representative in Japan and must register with the Legal Affairs Bureau of the Ministry of Justice. In addition, the establishment of a branch office is considered a direct investment under the Foreign Exchange and Foreign Trade Control Law requiring notification to the Ministry of Finance through the Bank of Japan within 15 days after the establishment of the branch office. As with joint ventures, for certain designated sectors, Ministry of Finance notification must be made prior to the establishment of the branch office; investment in other designated sectors such as broadcasting or telecommunications services may be restricted or prohibited. 3. Incorporation in Japan (Subsidiary) An alternative to a branch of the U.S. company is to incorporate a wholly-owned corporation in Japan that is owned by the U.S. corporation or its shareholders. However, as with establishing a branch office or joint venture, certain sectors are restricted. Setting up a wholly-owned subsidiary will involve more time and expense, but it can offer an effective means to guarantee better protection for proprietary information, obtain credit, and penetrate some markets which have subtle but substantial barriers to imports. Moreover, there is a perception in Japan that companies that establish subsidiaries are more committed to the market than companies that set up representative or branch offices. 4. Jointly Owned Office A fourth approach is to pool resources of several firms which have complementary product lines and want to sell in Japan. Such a group might establish a marketing association, consortium, or jointly owned export management company, and set up a sales and service branch or subsidiary office in Japan. This operation may take the form of a representative office which handles contacts with agents, distributors, and customers. Considering the importance of brand image in Japan, group members may wish to consider adopting a group logo which would be a universally recognized and accepted identity for their product line. This approach is not widely used by U.S. firms in Japan, but has been successfully employed by a number a European groups. 5. Guidance for Investing in Japan While merger and acquisition specialists report greater activity advising foreign companies about making major direct investments in Japanese companies, acquisition of a Japanese company, particularly by a non-Japanese company, is still generally viewed with disfavor in Japan (the colloquial Japanese term for acquisition being "hijacking"). Foreign takeovers of Japanese companies remain few. The targets of a foreign takeover tend to be private, family-owned firms with annual sales of less than 1 billion yen ($10 million); the average value of the takeover is only $15 million. There is plenty of room for more U.S. investment in Japan. Over 339 major Japanese companies have wholly owned subsidiaries in the United States, compared to 150 of the 222 Fortune 500 companies with operations in Japan. Almost 75% of Japan's exports to the United States are shipments from Japanese corporate parents to their U.S. subsidiaries. Japanese subsidiaries' exports from the U.S. to their Japanese parent presently represent over 20% of U.S. exports to Japan, while American firms' exports to their Japan- based subsidiaries represent less than 10% of total U.S. exports to Japan. While this may reflect the fact that many U.S. firms do business in Japan through Japanese agents and distributors, these figures show that the differences in presence between U.S. and foreign companies in each other's market and the U.S.-Japan trade gap are directly related. Despite the recent drop in land prices, land and housing costs remain extremely high. In Tokyo, a home costs the equivalent of 12 years' income, far beyond the reach of most salaried workers, while condominiums prices are now dropping to within reach. High consumer prices in Japan are primarily due to the high cost of distribution in Japan resulting in a cost of living in Tokyo that is 50% or more greater than New York City--according to the Japan Times, even with the yen at 106 to the dollar, the yen's purchasing power is estimated as weak as 190 yen/dollar. In contrast, residential rents are not unreasonable; renters, many of whom have given up on ever owning a home, contribute to domestic demand while at the same time funneling a healthy flow of disposable income into savings for their retirement years. Japan's land prices fell in 1993 for the third consecutive year. Prices of residential property fell 4.7% from a year earlier while prices of commercial property declined 11.3%, and 18% in Tokyo. Condominium prices are down to 5.5 times the Japanese average annual income of 7 million yen, for an average apartment of 65 square meters. While analysts predict continued drops, this only represents a retrenchment from the giddy increases of 68.6% for residential property and 61.1% of commercial real estate in 1987 at the height of the speculative bubble, the high point of prices that reached 250% of their 1983 level. Given the low turnover of Japanese real estate, this situation is more of a problem for banks and borrowers who took out loans since 1987 than it does for long-term real property owners. According to the Bank of Tokyo, supply of office space in Tokyo will be plentiful through 1997. The vacancy rate for office buildings in the 23 wards (boroughs) of Tokyo was 9% as of December 1993. This gives companies opportunities to relocate into larger offices at lower rents. Despite the rise of the yen against the dollar, the lower land, commercial rent and share prices in the Japan of 1993 and 1994 compared to the 1985 - 1990 period and the financing crunch affecting many Japanese companies provide U.S. companies with an excellent opportunity to set up, expand or buy businesses in Japan. Additional investment opportunities are presented by the fact that today a generation of owners of many of Japan's 2.28 million businesses that were started or rebuilt in the decade following World War II are retiring en masse, without an heir or family member to take over the business. Also, the tightening of credit to small and medium sized businesses, which account for 80% of Japan's jobs, offers new opportunities for mergers and acquisitions especially of wholesalers, which can be the key to product distribution in Japan. U.S. companies should also carefully examine the Ministry of International Trade and Industry's new programs for promoting exports to and foreign investment in Japan, including the loan programs through Japan's Export-Import Bank and the Japan Development Bank. In 1992, 43 Japanese firms were wholly or partly bought out by foreign enterprises--140% more than in 1991. 6. MITI'S Measures for Promoting Direct Foreign Investment in Japan In a major turnaround from former policy, MITI is now promoting direct foreign investment in Japan, in light of the 20:1 disparity between Japanese direct investment overseas and foreign direct investment in Japan in recent years. Highlights of MITI's proposals include (1) expansion of JETRO's programs and activities on promoting foreign direct investment in Japan; (2) low interest loan programs to allow foreign companies to establish subsidiaries and 50% or more joint ventures in Japan; (3) a MITI-financed quasi- governmental business service support company to assist foreign investors locate in Japan; (4) foreign trade ("foreign access") zones in Japan; (6) credit insurance to assist small and medium size importers; and (7) loan guarantees. The quasi-governmental corporation to assist foreign investors locate in Japan is presently being organized by MITI. Shareholders will include major Japanese companies and affiliates of foreign companies in Japan. It will serve as a consultant and matchmaker. Information services, expert consultations, assistance in recruiting employees, assistance in locating and buying or leasing real property for offices, factories or other facilities, training and seminars, and other business services such as interpreters will be provided. G. Selling Factors/Techniques Personal contact with customers is very important. Once a distribution route is found, a U.S. company visiting or resident in Japan should accompany their Japanese agent or distributor on visits to potential or existing Japanese customers. A U.S. company should not entrust an agent, distributor, importer or wholesaler with the sole responsibility for making product presentations to retailers and end users. Making sales calls will demonstrate commitment to the market and better highlight the U.S. product's strengths and attributes. It also is an excellent way to obtain market feedback on necessary or desirable improvements to the product that will help increase sales in Japan and elsewhere. It is also essential to have multiple sources of information about the Japanese market. Companies that do business in Japan through distributors or even through subsidiaries without frequent visits from headquarters often only know the Japan their distributors or subsidiary shows them. Too many Japanese-American business relationships sour after a successful honeymoon period. A common mistake made by American companies in Japan is the failure to provide adequate support for their Japanese business partner after the sale. This may include assuming part of the import risk. This will help prevent a distributor from implementing a conservative, low-volume, high-markup marketing strategy, that will protect their interests while leaving the U.S. product's full sales potential undeveloped. Innovation in product design and marketing are key factors. Successful products set themselves apart from the competition. The U.S. exporter should consider seriously suggestions for product modification or improvement suggested by their Japanese distributor, and should constantly strive to improve the product to stay ahead of the Japanese competition. Part of selling in Japan is knowing how to negotiate and maintain relationships with Japanese businesspeople. It is important to be honest and direct, while avoiding being overbearing or boastful. Business negotiations may often seem to proceed slowly, as the Japanese side may prefer no agreement over being criticized later for making a mistake. Initial contacts between Japanese firms are usually formal and made at the executive level, while more detailed negotiations are often carried out at the working level. Typically, the first meeting is to get acquainted, establish the broad interest of the calling party, and allow both sides an opportunity to "size each other up" to determine whether or not more substantive discussions are desirable. The U.S. representative may have a series of meetings with a large number of Japanese company representatives, whose most important need is to feel comfortable dealing with the U.S. company and its product. While many Japanese business executives speak some English, the hiring by the U.S. company of a skilled and well-briefed interpreter, while expensive, can avoid miscommunication. Though it is not uncommon to hear that some U.S. firms do business in Japan without a signed contract, written contracts between U.S. and Japanese firms have become a universally accepted practice in Japan and are a practical necessity to satisfy tax, customs, and other legal requirements. Japanese companies prefer short, general contracts, while U.S. companies prefer to spell out the rights and obligations in detail. A contract should be viewed as part of a greater effort to create an understanding of mutual obligations and expectations, rather than a recipe in case of a lawsuit. H. Advertising and Trade Promotion 1. Advertising Much of Japan's broadcast and print media do not deal with advertisers directly, but deal with Japan's top five advertising agencies (Dentsu Inc., Hakuhodo Inc., Tokyu Agency International Inc., Daiko Advertising Inc., and Asatsu Inc.) who reserve and resell time/space slots. In general "mood" or "image" advertising sells better in Japan; hard-sell, "wordy" messages and comparative or combative advertising is considered bad taste and do not work in Japan. Because many products from the United States fit into a cultural or an industrial environment that may not currently exist in Japan, consumer education of the product's purpose, use, and quality may be necessary. With the current slump in the Japanese economy, advertising costs are now very negotiable and agencies, looking for any business, are cooperative even with small companies. Interested advertisers should negotiate with several agencies to compare services and costs. The most cost-effective method of advertising by small to medium size new-to-market U.S. companies in Japan is in one of Japan's 2,250 weekly or monthly popular magazines, which cover many interest groups, or in one of Japan's many industrial daily, weekly or monthly newspapers and trade journals. Because advertising space is presold to major agencies, major newspapers and magazines, especially general magazines and women's magazines, usually do not accept advertisements directly from clients. Since the best ad spaces are generally held by the major agencies, which determine the priority of ads, it is often difficult for small or new businesses to get space where they want. Advertisers which work under contract with one agency often receive some advantages such as priority space, quantity discount, marketing and advertising consulting, etc. Specialty magazines follow the same kind of procedure as mass daily newspapers, with the publishing company's sales department dealing directly with clients. Only large multinational U.S. companies can afford to place ads in Japan's five major national daily newspapers or commercials on Japanese television, all of which accept advertisements or commercials for either national or regional coverage. Regional and local newspapers and television stations, based in prefectural capitals, and sports daily newspapers, are less expensive. While Japan has only a relative few radio stations (Tokyo, for example, has only 4 AM and 6 FM commercial stations), radio advertising may have potential worth investigating. Another mass advertising option is transit advertising. Railroads are the primary means of transportation for commuters in major cities and carry over 21 billion passengers annually. Transit advertisements are located either inside commuter railcars or buses or in stations. Ads inside trains and buses include hanging flyers, framed posters, and stickers. The major ad companies control space, as with the other media. 2. Trade Promotion It is key for US exporters of all kinds of good and services to get into the Japanese trade event circuit -- not only in Tokyo -- but in the huge regional economies and industrial centers, where 65 percent of Japan's 1,200 international conferences, seminars and trade shows take place. These events are being attended more and more by regulatory officials and decision makers from all throughout the Asian region. U.S. companies should also consider U.S. Department of Commerce or state- or industry organization-sponsored trade shows and trade missions, as well as use of the U.S. Trade Center in Tokyo and other available U.S. Government facilities such as the U.S. Information Services' American Centers in Osaka, Nagoya, Fukuoka and Sapporo for their individual demonstrations, seminars, meetings and receptions. I. Pricing Product The acceptance of a U.S. product in the Japanese market is based primarily on its quality and after sales service, not its price. Japanese consumers usually will pay more for superior quality, but today they are starting to look for better value. Therefore, pricing analysis is a critical aspect of marketing in Japan. Mark-ups at the various levels of the Japanese distribution system have caused some imported items to be priced at levels which are uncompetitive with Japanese domestic products, even though the landed price of the imported product was comparable or lower. Prices of competitive Japanese products can usually be taken as a starting point for tracing back through distribution channels the appropriate margins for each link in the chain. At the same time, products that compete on the basis of image may be negatively impacted by "bargain" price reductions, as this tends to cheapen the image of these products with Japanese consumers. Negotiations with a prospective agent should be conducted to determine a realistic selling price which would include reasonable and acceptable mark-ups. In setting an export price, it is also important to take into account any costs the exporter will be assuming in the Japanese market. These export costs can include the sales commission of the Japanese partner, insurance and freight costs, finance charges for the transaction cycle (i.e. bank fees and charges for a letter of credit), marketing costs for Japan, and possibly duties and taxes. To pay for these various costs, it may be necessary to raise prices or induce the Japanese partner to take on some of the costs. Of course, in setting the FOB or CIF price to a Japanese distributor, the U.S. exporter should eliminate from the export price all purely domestic costs involved in marketing the product in the United States. For the past 40 years, Japanese manufacturers of consumer goods have set prices for each level of the distribution channel using the tatene price system (TPS). Under the TPS, manufacturers set prices to wholesalers, secondary wholesalers, retailers, and consumers. Manufacturer's rebates and liberal return policies ("henpin") for unsold goods enable the TPS to work--reducing retailer risk while maximizing factory prices. Since almost all manufacturers in a given industry now give similar rebates to all their buyers, the original sales incentive rationale for rebates has in fact given way to resale price maintenance. However, the Japan Fair Trade Commission has recently promulgated guidelines prohibiting most resale price maintenance. Moreover, the financial burden of giving virtually automatic rebates as a "reward" for maintaining set prices has become unbearably heavy for many manufacturers. External factors which are also forcing change include: (1) emerging price consciousness among Japanese consumers due to the economic recession and pending modifications to the Japanese lifetime employment system and subsequent fears of unemployment; (2) pressure for wholesalers and retailers to sell at discount prices to reduce inventory due to chronic oversupply; and (3) complicated rebate schemes have bred complicated paperwork, which has become an expensive and totally unproductive cost of doing business. These factors are forcing an open price system to slowly emerge in Japan in the consumer goods sector. Under the open price system, however, wholesalers and retailers will be able to decide prices independently. The return of unsold goods must be reduced to offset lower margins by manufacturers. The distributor's role in selecting and purchasing items will become more important. This will drastically change methods of discounting and advertising. The transparency of business transactions should significantly increase, consumer prices should start coming down, and it will become easier to set export prices. J. Sales Service/Customer Support Sales service (before, during, and after the sale) and customer support are critical elements in doing business in Japan and should be considered part of the "product package." Every effort should be made to answer technical questions and make sure that shipments are made on time and handled with the greatest of care. If there is a problem, it should be rectified as soon as possible and sincere apologies offered. Strict arrangements for quality control (both before and after shipment) should be made by the exporter. Even if the goods are damaged in transit and "it is not the exporter's fault," to Japanese buyers, it does not matter who is "at fault." They will simply take their business elsewhere next time. Of course, the best mechanism and the most certain way to ensure quality control is for the U.S. exporter to establish an office in Japan. If this is not possible due to financial considerations, arrangements for customer support should be made either with the Japanese distributor or an acceptable third party. K. Selling to the Government Japanese government entities are interested in purchasing a wide range of goods from telecommunications equipment, computer equipment, and scientific and testing instruments to other, less sophisticated products and supplies. Recent changes in Japanese government procurement as a result of the Framework Negotiations and the GATT Uruguay Round have greatly expanded the scope of contracts the U.S. suppliers of goods and services can bid on. Prospective bidders for government procurement must be pre- qualified by the government agency to whom they wish to sell, and pursue the tender under competitive bidding practices. In most cases, Japanese government tender solicitation documents are in Japanese only. Tender documents must be submitted in Japanese only (Nippon Telegraph and Telephone (NTT) tenders may be submitted in English). To facilitate information gathering and applications for tender documents, it is strongly recommended, although not mandatory, that the U.S. supplier appoint an agent or representative in Japan because of short deadlines and the necessity to submit bids and other documentation in Japanese; chances of successfully bidding on Japanese government tenders without some representation in Japan are very limited. To become a qualified supplier, firms and/or their agents must apply for qualification screening. Each Japanese government agency specifies in the Kampo (the Japanese Government's Official Gazette) an open period prior to the beginning of the Japanese fiscal year which starts April 1 (most firms apply in January or February) for receipt of the applications. If a company misses this open period, applications for the qualification screening may still be submitted. However, in such a case, the validity term will be from the date when qualification is given to March 31 of the year given by the announcing agency. Specific tender notices are published in the Kampo at various times, generally fifty days prior to the time of bid. Under the provisions of the GATT Procurement Code, foreign companies are permitted to bid on specific invitations prior to qualification provided there is sufficient time to complete the qualification procedures. To assist firms competing for Japanese government procurement contracts, the U.S. Department of Commerce has extended its Trade Opportunities Program (TOP) to disseminate summaries of translated tender announcements on the Economic Bulletin Board (EBB). Tender announcements also appear in the Commerce Business Daily on a regular basis, which is a daily electronic and newsprint listing of U.S. Government procurement invitations, contract awards, subcontracting leads, sales of surplus property, and foreign business opportunities. U.S. Department of Commerce district offices can also assist potential U.S. bidders by identifying firms that provide translation services. The U.S. Embassy in Tokyo does not purchase Japanese government tender documents on behalf of individual U.S. firms nor does the Embassy process Japanese government tenders on behalf of U.S. firms. All documents and all qualifying bids and contracts must be prepared in Japanese and sent by U.S. firms directly to applicable Japanese government agencies. Suppliers who are not pre-qualified or in the pre-qualification process are not eligible to request bid solicitations. Under no circumstances should unqualified suppliers make a request in English for bid documents. L. Protecting Your Product from Intellectual Property Rights Infringement Protection of intellectual property rights should be part of every U.S. exporter's basic market strategy in Japan. It is necessary to file applications to register patents and trademarks in Japan to obtain protection, but prior filing in the United States can provide certain advantages if applications are filed promptly in Japan. A U.S. patent or trademark attorney, as appropriate, can provide advice, but it will be necessary to hire a Japanese attorney (bengoshi) or patent practitioner (benrishi), preferably one with an established relationship with the U.S. exporter's U.S. attorney, to prosecute the patent or trademark application. Except for voluntary registration of computer programs, there is no system of copyright registration, however, and U.S. copyrights and sound recordings are recognized in Japan by international treaty. U.S.-produced semiconductor chip design- layouts are protected under a special law if registered with the Industrial Property Cooperation Center. Obtaining and protecting patent and trademark rights in Japan can be time-consuming and costly. While the process to safeguard such rights might seem prohibitive, lack of protection would permit competitors both in and outside of Japan to copy your product or production process. Even when intellectual property rights have been acquired, pirating of technology and designs can occur in Japan, as it could in almost any country. Each company in a trading or licensing agreement should understand clearly what its rights and obligations are with respect to the intellectual property rights owned or acquired by the other. Such a clear understanding helps to create a good rapport based on mutual trust, thereby ensuring the success of the trading or licensing agreement. 1. Patents, Trademarks, Utility Models and Designs Unlike U.S. patent law, patents are granted to the first to file an application for a particular invention, rather than to the first to invent. Although in 1995 Japan will start accepting filings in English, to be followed by a translation, companies should ensure that translations of their applications are perfect. Prompt filing in Japan is important because printed publication of a description of the invention anywhere in the world, or knowledge or use of the invention in Japan, prior to the filing date of the Japanese application would preclude the grant of a patent on the application. Also unlike the United States, where examination of patent applications is automatic, an applicant must request examination of his patent application in Japan but has seven years in which to do so. As is true in most countries of the world, but not in the United States, all patent applications are published prior to approval 18 months after filing. If, during the examination, the Japanese Patent Office (JPO) finds no impediment to the grant of a patent for a particular invention, it publishes the patent application a second time, including any changes that have been made during the examination. Following this second publication of the application, any party may oppose the grant of a patent by demonstrating that the standards for patentability are not met by the invention. If the application is uncontested in Japan and all requirements are met, the patent is granted and valid for 15 years from the date the application is published (but not more than 20 years from the date the application was submitted). It takes a long time to obtain a patent in Japan -- an average of five to six years, compared to 18 months in the United States. An applicant can request accelerated examination; this procedure is rarely used as it has substantial limitations. During the examination period, no effective legal protection exists; this will change in 1995 as Japan changes its term of protection to 20 years from date of grant. Japan's Trademark Law protects trademarks and service marks. As is the case with patent applications, a resident agent (usually a lawyer or patent agent) must prosecute the trademark application. As with the processing of patent applications, Japan's trademark registration process is very slow. It takes an average of 4 years to process a trademark registration in Japan, compared with an average of 13 months in the United States. Japan's Patent Law also allows registration of utility models, a form of minor patent with an 8-year term of protection. A separate Design Law allows registration of designs, giving 15 years of protection. 2. Unfair Competition and Trade Secrets The only protection available for a trademark in Japan prior to registration is under the Japanese Unfair Competition Law. Under this law, the owner of the mark must demonstrate that the mark is well-known in Japan and that consumers will be confused by the use of an identical or similar mark by the unauthorized user. Japan enacted amendments to the Unfair Competition Law in 1990 which provide some measure of protection from theft of trade secrets such as know-how, customer lists, sales manuals, and experimental data. The law which was amended completely in 1993, provides for injunctions against wrongful use, acquisition, or disclosure of a trade secret by any person who knew or should have known that the information in question was misappropriated. A problem with judicial procedure remains, and makes enforcement of rights without loss of the trade secret difficult. M. Need for a Local Attorney A U.S. company resident in Japan is not legally required to use a Japanese attorney for filings, registrations, contracts or other legal documents, which can be prepared by in-house staff, but retaining a competent Japanese attorney (bengoshi), patent practitioner (benrishi) or other legal professional is a practical necessity. A U.S. company not resident in Japan should also retain competent Japanese counsel. As stated above, patents and trademarks must be filed through a Japanese agent, which should be a licensed attorney or patent practitioner.