Six Reasons Startups Should Invest in Japan

Japan is an ideal place to open up offices and invest for the long-term.

After Japan’s economic crash of the late 90’s, a fog settled over the land of the rising sun. Nearly two decades of deflation, a perceived lack of Japanese innovation, and a rapidly aging workforce have kept the sun from burning it off. Westerners have the false impressions that Japanese companies lack English speakers, have punishingly long business partnership cycles, and that the market is too competitive and tilted towards domestic companies. Many startups assume Japan is too difficult to penetrate.

They’re wrong. In fact, Japan is surprisingly welcoming to startups. The Silicon Valley technology companies smart enough to invest have already found success here.

Startup Costs Are Reasonable

Getting started in Japan with a small office and a few business-development people is affordable and easy, as long as your CEO doesn’t need a corner office with a view of Tokyo Bay from Roppongi Hills. The same market forces that long impeded Japan’s economic recovery make the economics for startups entering Japan more attractive than ever. Deflation and the lack of nominal wage increases have made Japanese labor, goods, and services cheaper. Top managers will require competitive market pricing, but hiring experienced staff comes at a much lower cost than in the US or Europe. While real estate prices in the US and Europe have increased, prices in Japan have remained flat since the collapse of Japan’s asset bubble. Rents are lower here than in nearly any other developed market and there are many low-cost, technology-friendly facilities — such as Mitsubishi’s EGG incubator center or any international temporary office like Servcorp.

Abe-San Wants You

Though the Japanese Government gets a bad rap in the press for shunning international business, the country has always been more inviting to foreigners than many of its neighbors in Asia. Attracting foreign businesses was a major goal of the Koizumi administration and remains a priority for Abe’s administration. JETRO provides attractive incentives for foreign companies that intend to invest significant funds in Japan. Abe-San has revived a program to provide tax incentives, free ‘incubator space’, and easy visa access for foreigners in Free Trade Zones in Fukuoka, Osaka, and Niigata for agriculture, healthcare, and energy businesses. It’s a huge step, even though Tokyo, the biggest attraction in Japan, is a glaring and unfortunate omission from these zones. The policy is already attracting foreign business to these areas and the 2020 Tokyo Olympics will bring even more changes to accommodate outside investment.

The Workforce is Increasingly Diverse and Multilingual

Historically, the most obvious reasons to avoid doing business in Japan were the language and cultural differences. Decades ago, Japanese executives were either unable or unwilling to speak English and reluctant to break from longstanding local business customs. Times have changed. Japanese students routinely attend overseas MBA programs, and the Japanese workforce increasingly conducts business in English. Even Rakuten has made it a loose corporate policy to only speak English. Locals now insist on speaking English whenever they encounter foreigners on the street. For anyone trying to improve his or her Japanese, it almost makes it impossible!

A multi-lingual workforce also conveys a more open-minded workforce. The banking crisis left many who swore by lifetime employment out of work and looking for new careers. Young and mid-level employees are now accustomed to changing jobs every few years and are excited to take on new opportunities with American companies.

Gilt Japan, a subsidiary of Gilt US, has found it increasingly easy to recruit local employees with promises of a more laid-back and open American work culture. Similarly, many international technology companies like Spotify, Airbnb, and Boku have been able to scale their operations fairly quickly by offering employees better working conditions than traditional Japanese companies.

Meanwhile, the size of the foreign workforce in Japan continues to grow. A good mark of this is the number of people who take the Japanese Language Proficiency Exam (JLPT) each year. Since 2000, JLPT takers have increased from 200,000 to 600,000 with a peak of 800,000 just before the banking crisis. This influx has made Japanese companies more and more at ease working with foreign-speaking workers in their own country.

Clear Gaps Exist in Software Innovation

The world once worried Japanese technological advancements would dominate all industries. That fear has evaporated. Japanese schools are graduating fewer engineers every year. Top students seek jobs at trading firms and international banks. The Japanese engineering and science students who matriculate rarely have the skills necessary to begin a software-engineering career right away. Most of the Japanese engineering education covers theory and hardware. Software has been a secondary feature at Japan’s academic institutions. This has led to a surprising rebalancing of the engineering resources at Japanese and American companies. The number of Japanese engineers has decreased every year since 2000 and American companies now typically employ twice the amount of engineering talent per total headcount, according to a report by Doshisha University professors in 2011.

Lastly, outside of video games, no major company has defined software innovation in Japan the way others have set the bar for consumer electronics or automobiles. A lack of Japanese software R&D created a gap in innovation in the consumer and business software markets. Airbnb’s entry into Japan illustrates this gap perfectly. When Airbnb recently opened in Japan, it faced no real competition. In China, on the other hand, there are at least three significant competitors with many new competitors opening every day. The B2B market is still maturing and there are even fewer competitors, Akira Kurabayashi of Salesforce Ventures in Japan said. US companies such as Salesforce and Marketo have been successful in establishing footholds in Japan. Their key to success was landing important clients early. Acquiring small, local startups with a few good customers may be a good market-entry strategy for Western B2B companies, Kurabayahi-san said.

Leaving aside Softbank and Rakuten, who made swift moves to fight Square’s entry into Japan’s payments market, incumbent companies in Japan do not move quickly enough to present real competitive threats to Silicon Valley startups. In cases where Softbank or Rakuten can’t be avoided, these companies can make excellent local partners.

Japanese Consumers Appreciate Products of the Best Quality

One of Steve Jobs’s unsung achievements is the success Apple enjoys in Japan. The iPhone embodies everything Japanese consumers love: simplicity, elegance, and intense attention to detail. Apple owns a 37 percent total market share of shipments and 47 percent share of smartphone shipments today. These numbers are increasing now that DoCoMo is finally pushing the iPhone aggressively. For those who have followed the mobile market in Japan over the years, it is astounding to think that an American company owns the largest share of mobile phone sales. For years, conventional wisdom held that the Japanese consumer was fiercely provincial and would not seek out foreign goods or services. Apple proved that the Japanese love for “best quality” goods transcends international borders. Consumers and businesses now associate American technology companies with high-quality products. Today, Silicon Valley technology is highly regarded in Japan, says Fujimoto-san, who is an Advisor to Lookout and other leading Silicon Valley companies for the Asian market. He recently helped to secure a deal for Lookout with that guaranteed the wireless security firm 10 million new subscribers. The deal, with Japan’s second-largest wireless carrier KDDI, took six months to close and KDDI dropped a local Japanese partner to work with Lookout.

Japanese Companies Make Excellent Partners

Though it takes time to seal the deal, Japanese companies make great partners and are extremely trustworthy, responsive, and reliable. The Japanese wireless carriers have yielded great returns for mobile application vendors. The trading firms — such as Mitsui, Sumitomo, and Mitsubishi — have a long history of investing and helping companies in Japan. And the large technology corporations such as Sony, Hitachi, and Toshiba are straightforward business partners and honor basic business practices like intellectual property.

Startups and venture capitalists often claim Japanese companies are too slow and daunting to work with. But this is not always the case. Rick Dyck, a long-time businessman in Japan who set up Honda’s first US manufacturing facility in Ohio discusses his experiences working with overseas semiconductor companies:

“Several times I have worked with US start-up component companies where we were able to get design-wins in Japan before the parent company got design-wins in the US. In several cases, this put us in an awkward situation where the US parent company fell on hard times or went bankrupt and we had to scramble in Japan to maintain a flow of components. In these cases, we usually ended up getting a license and finding alternative ways to supply the Japanese customer. I think US companies are skeptical about designing in components from startups, while Japanese companies are more amenable to adopting new technology.”

In other words, Japanese companies can be early adopters of new technology but have been burned by American startups before and therefore choose partners very carefully. Trust tends to be more important than contracts and takes time to build. Developing this type of trust is not a typical characteristic of Silicon Valley’s culture, which is based more on fast-moving decisions and legal contracts. If a startup can find a partner with whom to develop this trust and bring innovative technology to bear, the combination will yield ample returns in a time frame acceptable to both parties.

As with any business relationship, the time to start building it is now. There are clear market opportunities today for software and technology companies willing to invest in Japan. Dismissing it would be a huge mistake.

Note from the authors – there will be follow-up articles to this one including startup tips and case studies.

Edited: Josh Wein

Co-Authors: Junichi Fujimoto and Rick Dyck