When to Expand to the Japanese Market

Introduction

“When should we go to Japan?” An increasingly common question for IT entrepreneurs with global ambitions and an important one since Japan is the third-largest economy and second-largest enterprise software market in the world. Recently there has been a resurgence of interest in Japan as the appetite there for new technology pulls companies in earlier. Yet it is still a tricky market and a bit unintuitive in many ways so getting it right, starting with market entry timing, is key. This article will help tech entrepreneurs think through the timing of when to take their company to Japan.

Background

20 years ago there was no real rush for US IT companies to go to Japan for two reasons: 1) there was a comfortable 3–5 year lag in technology adoption between the US and Japan, giving startups plenty of time to focus on the US domestic market and other English speaking countries first; 2) the energy and resources required to enter and launch in Japan were high, so naturally companies left entering the Japan market until later when they had the fortitude and resources to do it properly. Japan was still a large market and those willing to spend the resources to venture there early (sometimes via a JV with a local firm) were sometimes richly rewarded, but it wasn’t urgent and it was a lot of work. So why was Japan previously so difficult? Generally speaking, Japanese companies have traditionally functioned more as social institutions rather than profit-seeking entities and so were very comfortable (in fact often preferred) being inefficient because their focus was more on providing lifetime employment rather than maximizing profits. Inefficient processes therefore were left alone and tasks that could be automated were often not in an effort to keep people employed. Moreover, IT’s primary function was generally limited to support for back-office functions like finance, HR, and accounting and was not seen as a strategic driver of core businesses (manufacturing, retail, insurance, banking, pharmaceutical, construction, agriculture, etc.) Bottom line, there was little urgency for IT innovation and in fact, there were many structural factors keeping the status quo firmly in place. Needless to say, it was not an environment friendly to new technology startups.

Today all that has changed. The lag between US and Japan technology adoption is significantly shorter and in some sectors even inverted (as in AI and automation). This is being driven partially by a government push for greater focus on shareholders (i.e. profitability, ROE, etc.) but more so because Japan now has the fastest aging and most rapidly shrinking population on the planet — compelling companies to be more efficient as the workforce naturally shrinks. Moreover, software now poses a threat to their core businesses (IoT in manufacturing, Fintech in banking, e-commerce in retail, etc.) further pushing Japanese companies to embrace software adoption and digital transformation.

This combination of existential externalities has created a tailwind for IT in Japan which has steadily strengthened over the past 10 years. Today, Japanese firms are scrambling to modernize sorely outdated IT infrastructure and integrate IT technology into their traditionally non-IT core businesses to remain competitive and fend off more agile upstarts. All of these trends (firmly in place prior to COVID) have predictably been accelerated through the course of the pandemic as has been the case elsewhere in the world. It doesn’t mean that Japan is necessarily smooth sailing for any and all startups, but the environment is significantly more friendly to tech in general and companies have a more forward-leaning posture towards newer disruptive technologies.

Timing

So what does this mean for IT companies with global ambitions?

Two things:

1. Companies are getting pulled into Japan earlier and (separate but related);
2. Competition for category hegemony in Japan is much more fierce.

How then should entrepreneurs who are already burdened with growth and competitive issues in their home markets determine the proper timing for pulling the trigger on expanding to Japan?

While there is no one correct answer, there are some rules of thumb to consider. First, start by asking the following questions:

Is my company ready for Japan?

• If you have achieved product-market fit in the US and you have a working (or even semi-working) GTM, chances are you should probably start to peek across the Pacific and see what is happening. Conversely, prior to establishing product-market fit and a functioning GTM, Japan can be a distraction — so allocating scarce resources there too early is not generally something we recommend. A big caveat to this is in cases where Japan, for whatever reason, represents a disproportionately large or strategic market for your technology. This was the case for a few of our portfolio companies in natural-disaster resilience, AI and automation where early investments in products for Japan reaped outsized results because clear use cases there developed faster than in other regions. Despite these exceptions, as a general rule get your product and GTM right in the US first, but once done don’t wait too long before assessing the opportunity in Japan.

Is Japan ready for your company? Here are some signs and other ways to assess Japan’s readiness:

• The most obvious, although still not very common, indication that Japan is ready for your company is of course revenue — Japanese customers purchasing your product even without a local Japan presence or a localized product. This rarely happened before, however, with the advent of cloud-based services it is no longer that unusual (especially in OSS, DevOps and creative/productivity/collaboration tools.) One mistake here though is to assume that because customers are already purchasing your product, even without local sales or support, that you can expect the market to continue to grow without making a direct investment. This is in most cases absolutely the wrong conclusion to come to. Early adopters in Japan behave very differently from the vast majority of companies who will require local sales, support, Japanese contracts, payment in yen and maybe even a fully localized product before they commit to buy. If you are one of the lucky few who are able to close business from Japan prior to your entry, see this as a positive market signal and justification for an earlier and perhaps more aggressive Japan entry and not an indication that the Japan opportunity can be exploited remotely.
• For most companies, however, significant or any revenue generated from Japan prior to a formal entry doesn’t usually happen and waiting for Japanese customers to buy first to “justify” an investment in the market is another losing (but unfortunately common) “strategy.” This usually happens not as the result of a conscious decision to deprioritize Japan, but more often because focus and resources get shifted naturally to English speaking regions from which inbound interest and orders are more common (ANZ, HK, Taiwan, Singapore, etc.) How then, can one assess the opportunity in Japan and avoid missing the optimal window of opportunity to enter the market if no (or few) inbound inquiries and orders are coming? The answer here is to start by identifying relevant market signals. At Geodesic, one of our portfolio company’s primary market signal was cloud adoption. This was a few years ago as the public cloud was just starting to gain significant traction outside of the US. For this particular company, in geographies where cloud adoption was strong, demand for their service predictably followed. So when they sent an executive to Japan to explore the market they wanted first and foremost to meet not with potential customers, but with AWS and GCP to ask about cloud adoption in general, relative to other Asian countries. They knew that if companies were adopting the cloud, their services would eventually also be needed even if companies didn’t recognize the need now. AWS and GCP confirmed that Japanese companies were adopting the cloud, and significantly faster than other APAC countries, so the company did formally enter Japan and has been performing very well ever since. Conversely, another one of our portfolio companies protects against a very specific type of fraud in the US and Europe. When their CEO visited Japan to explore a possible Japan entry, he found that the specific type of fraud they protected against was not a big problem in Japan. So the company correctly decided to delay their Japan entry until they could develop more relevant products for the Japanese market. Once again, while inbound interest from Japan is on the rise, Japanese companies often will not purchase until a company has an established presence in Japan (even after a successful POC!) so interpreting lack of revenue as lack of demand is counterproductive. Instead, identifying the relevant market signals and then looking for those signals in Japan and using that as a gauge to determine Japan market entry timing will produce far superior results.
• Competition: always keeping an eye on the competition is a good idea. Not that you have to blindly follow them, but ignoring them is also not a winning strategy. Especially if you see them moving in Japan before you, then understanding why is a good idea. Even if you are not ready, you should at least start to prepare in order to avoid falling behind.

Again, there is no right answer regarding the precise timing for optimal Japan entry. But to state the obvious about the guidelines listed above, if you’ve established product-market fit and have a working GTM in the US, have paying early adopter customers from Japan and if your competition is already there, then most likely you are late and need to hurry to get caught up. Conversely, if you’re still struggling with product-market fit in the US or if your GTM is not fully functioning, even if you might have a few inbound inquiries from Japan, you should probably send them a nice email asking them to be patient and then include them in your lead nurturing pool until you’re ready. There are of course an endless number of possible iterations in between, but the questions above should help you think through the issues before you come to any conclusions.

In juxtaposition to 20 years ago, Japan now quickly follows suit in adopting new US technology trends so the optimal window of opportunity to enter Japan comes much earlier than it did in the past. If you’d like to chat with someone at Geodesic about your company’s specific situation, give us a call and we’d be happy to discuss.

(The next article in this series will address the equally important question of “how” to enter Japan. Stay tuned!)