Partnering with IT Vendors in Japan (Part 1)

Japan is a tough market to crack for western tech firms but once you manage to break the shell open, it will surely contribute significantly to the company's global revenue. So how would a tech startup enter the Japan market? Partnership comes to mind almost immediately, but with whom? Do they add value? Will they understand the new technology and its value proposition? Why not a direct sales force?

Before diving into these questions, let's take a look at the Japan market as a whole—with or without partnership considerations.

Japan's business culture is consummately trust-based, and in general, risk-averse. So a newcomer to the market is gazed upon with eyes of suspicion. Even with a respectful global presence, if you have no clients in the turf, you're considered a fly-by-night operation that may be here now but gone tomorrow. When we take a peek inside the corporate walls, management and staff generally work within their assigned boundaries and prioritize wa (harmony) over efficiencies and innovation. The nail that sticks . . . as the Japanese saying goes.

Organizationally, the traditional Japanese corporation is structured differently from western companies. One that stands out significantly and is relevant for our theme is the IT department's role. The information systems department—as they’re commonly called here—rarely plays a significant role in introducing technologies to solve corporate-wide problems. The department is often only a cost center of administrators and technical staff to maintain whatever systems that are already in place. As a result, it's pretty rare to find a senior executive with a CIO title in traditional Japanese companies. IT departments depend heavily on systems integrators to introduce new technologies that may benefit the company in a way that would deflect risk and reduce workload for the department staff.

The traditional Japanese corporate mindset when it comes to serving their customers is quite distinct from that of western companies. In the west, with cloud and SaaS now being the mainstream, customer success is no longer a peculiar idiom used only by Salesforce. Many Japanese corporations struggle to shift their mindset from customer satisfaction to customer success. Along with the culture's demand for perfection—bordering on obsessive—too many companies put their customers on a pedestal.

Over-servicing clients is considered a virtue and is prevalent in traditional corporate Japan.

With a 30,000-foot view of Japan's corporate culture in place, let's explore the domestic IT vendors’ market landscape. These are the players that western tech firms should look at as potential partners. Even if you're not familiar with the domestic market, you've most likely heard of the top multinationals like Fujitsu, NEC, and Hitachi. These big three—amiably coined 'FNH'—is a trio of major hardware manufacturers of electronics from household appliances to the world's fastest supercomputers (Fugaku by Fujitsu), early warning 3D radar systems (J/TPS-102 by NEC), and the Shinkansen bullet trains (Hitachi). They all have huge IT business units and collectively hold 16% share of the $464 billion market. However, there are many more IT vendors—large and small—in Japan who have the potential to be the synergistic partner that a western tech startup needs.

Although the boundaries are now blurry, we can roughly categorize domestic IT vendors into two categories: system integrators (SIs) and distributors. Most, if not all, of these companies claim to be both. Naturally, they're interested in both license and services revenues. (Consulting firms like Accenture, PwC and other global SIs will be kept out of scope here since a partnership that involves resale is out of scope for these companies.)

The FNH trio mentioned above belong to the SI category while companies like SoftBank are distributors. The Japanese further classify SIs into three vendor types: maker-type, user-type and independent. Needless to say, FNH are in the maker-type (major manufacturer) along with companies like Toshiba. User-type vendors are one-time IT departments of major companies that spun off as separate businesses. Independents are companies that don't have the kind of roots that the other two have.

In the early days, maker-type companies manufactured mainframes that competed with the legendary IBM System/360. Fujitsu, for instance, evolved their core business from hardware to services much like IBM. It is now the world's fourth largest IT services provider after IBM, Accenture, and AWS. FNH have tremendous reach domestically with their network of subsidiaries and related companies. These multinationals also have extensive reach outside of Japan, of course, in all regions with substantial investments into the North American and European markets. Their overseas operations, however, operate with much independence. In general, overseas subsidiaries do not have quite the influence one would expect on decisions made back in Tokyo. Just because you know a senior executive of NEC Corp. of America, it doesn't mean she can help you get your foot in the door at headquarters.

User-types include companies like Nomura Research Institute (NRI)—a subsidiary of Nomura Holdings, the most dominant securities firm in Japan. NRI's expertise, naturally, is in the financial services industry alongside its parent company. Outside of FSI, their customer base includes major brands like 7-Eleven (both US and its Japanese parent), Sapporo Beer, and Japan Airlines, leveraging their FSI expertise in financial systems projects for these companies.

Although its classification as a user-type is debatable, NTT Data is Japan's largest among companies whose business is exclusively IT services. With annual revenues of over $20 billion, this subsidiary is one of the five major pillars of the NTT Group. Their claim to fame are large-scale projects—many of them public sector—as its parent company is NTT whose abbreviated name is derived from the original Nippon Telegraph and Telephone Public Corporation, a state monopoly that was privatized in 1985.

There is a vast array of independents, our third SI type, in the market. By far, Otsuka Corporation is largest in this category with over $5 billion in revenue. With its roots in selling copy machines in the 1960s, Otsuka expanded its offerings to office automation machines, office PCs, and networking to what they are today—a system integrator with countless products and services including IT outsourcing. Other independents are dwarfed by Otsuka, the closest being Fuji Soft at roughly quarter the size. Many in this category specialize in one area, such as Net One Systems who, as the name implies, specialize in networking. There are hundreds of other independents with narrower focuses, where their businesses are based on a single software vendor such as Oracle or Salesforce.

We classify distributors in a different genre from SIs, as a distributor's main focus is in the margins they gain from reselling products. DIS (Daiwabo Information Systems) typifies this genre. Their bread and butter comes from the distribution of PCs, networking equipment, and their peripherals. The Daiwabo distributes over 3.9 million PCs—a 26% market share.

There's a handful of multinationals that are major players in this genre. The big three MFP (multi-function printer) manufacturers Canon, Ricoh, and Fuji Film (formerly Fuji Xerox) have big chunks of the market share, particularly in the SME sector. The MFP players leverage their dominance in the document/printer space by anchoring themselves to accounts with printers and copiers, then expanding their offerings to other more complex products including software.

Although best know for being the second largest wireless carrier in Japan and the $96 billion Vision Fund, SoftBank and its group companies distribute a broad array of IT products imported from the US, Europe, Israel, India, and China. When he founded the company, Masa Son christened it SoftBank envisioning the company to become the department store of software. Because of its progressive outlook—particularly with AI and ML—in tandem with huge financial resources, SoftBank is a sui generis IT vendor.

There are myriads of other mid-sized distributors in Japan with revenues below $1 billion. They may not have the distribution network that the big players have but overcome the disadvantage with agility and execution. One such company is Ashisuto, a $300 million company with 1,200+ employees with a breadth of offerings from legacy systems to cloud services. Founded by an American, Bill Totten, Ashisuto was among Oracle's first distributors in Japan. There are hundreds more mid-sized distributors whose niche matches with a tech startup entering Japan.

Japan's unique business culture intertwined with each of the domestic IT vendors' distinctive characteristics often makes partnering with them a cumbersome proposition for a newcomer to the space.

Next in this series, we'll discover what to expect from an IT vendor and vice versa. We'll also explore some of the best practices in doing business with a partner in Japan and what some of the options are in the partnership model.

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