DEPARTMENT OF COMMERCE BUREAU OF FOREIGN AND DOMESTIC COMMERCE SALES TERRITORIES IN JAPAN f. By PAUL P. STEINTORF AMERICAN TRADE COMMISSIONER TOKYO, JAPAN the mm OF THE .Jk U.* UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON: 1929 SALES TERRITORIES IN JAPAN Japan, because of its limited area and high state of commercial development, is generally considered as a single unit in the placing of agencies. There are, how¬ ever, instances when it would be of ad¬ vantage to divide the territory into at least two sales districts and, in any case, a thorough understanding of the trade possibilities of the various industrial and commercial centers is of importance in selecting a sales representative for the country. Organization and Nature of Japanese Business. The foreign trade of Japan has been highly developed and is concentrated in the hands of a comparatively small num¬ ber of large trading companies. These companies have built up elaborate organi¬ zations with branches throughout Japan and with offices in all of the more impor¬ tant commercial centers of the w T orld. The dominance of such companies is a result of the peculiar conditions govern¬ ing business in Japan. The greater part of retail distribution is conducted on an extremely small scale. In every Japanese city there are literally thousands of tiny shops, each of which handles a single specialized line or product. These small merchants have very limited credit facili¬ ties, have no knowledge of any language except Japanese, and are totally unac¬ quainted with the elaborate technique of foreign trade. Furthermore, a very con- 64907—29-1 (1) 2 siderable part of the industrial produc¬ tion of Japan is the result of small family undertakings which are similarly un¬ equipped for foreign trade. Even the larger factories which have sufficient re¬ sources to undertake foreign sales and purchases find it more profitable to turn over their foreign business to the special¬ ized trading companies than to build up the elaborate and expensive organization necessary for foreign trade. Importance of the Great Family Groups. The large trading companies are gener¬ ally subsidiary organizations of the great family groups which dominate present- day Japan. The functions and organiza¬ tion of these are outlined in the following excerpts from a report by Consul J. W. Ballantine, Tokyo: “ The family group, which took such a prominent place in the early development of Japan, is still a dominant factor in Japanese economic life. Its business may be described as a gigantic vertical trust, covering nearly every field of economic activity. Generally control of the enter¬ prises of such a family group is voted in a holding company for a specific purpose. The direction of the activities of one of the largest of these groups, for example, is centered in an ordinary partnership capitalized at 200,000,000 yen (approxi¬ mately $100,000,000). This company con¬ trols 21 other organizations with an ag¬ gregate paid-up capital of 475,245,000 yen (approximately $237,000,000), whose ac¬ tivities include banking, real estate, trust business, warehousing, mining, manufac¬ turing, and transportation. “ There are about 15 of these great family organizations, of which the Mitsui, Iwasaki, Sumitomo, Yasuda, Matsukata, Okura, Suzuki, Asano, and Kuhara inter- 3 • ests are the most important. These nine families control and operate 144 compa¬ nies with an aggregate paid-up capital of about 2,360,000,000 yen (approximately $1,180,000,000). In addition they are in¬ terested in a number of other undertak¬ ings that are not listed in available re¬ turns ; in fact, it has been estimated that the family groups control not less than 30 per cent of the total business capital of Japan. “ The trading companies controlled by these financial groups supply local manu¬ facturers with raw materials, finance them during the process of production, and assemble, grade, and pack the prod¬ ucts of a large number of households. In the case of imports they are able to quote laid-down prices on all varieties of foreign goods, and often carry large stocks of im¬ ported goods ready for immediate deliv¬ ery. They also grant credit terms and have service organizations for the supply of spare parts, repairs, etc.” Foreign Trading Companies. In addition there are a number of large American and other foreign trading com¬ panies which maintain organizations simi¬ lar in size and scope. These companies have been established in Japan for many years and have built up organizations that are conversant with every aspect of Japanese business. They formerly han¬ dled every kind of product and engaged in both export and import business. During recent years, however, there has been a tendency to concentrate more and more on specialized import lines, such as machinery, machine tools, electrical equip¬ ment, hardware, office specialties, and iron and steel products. For commodities of this sort they are excellent agents. 4 Small Trading Companies. Other sales agencies are the smaller Japanese trading companies which usually specialize in one or more technical lines, the commission merchants, and the indi¬ vidual manufacturer’s agents. The small Japanese companies are at some disad¬ vantage in competing with the great fam¬ ily groups, but nevertheless they secure a considerable amount of business. They are particularly valuable to the American firm which may, for one reason or an¬ other, fail to place its line with one of the larger companies, since it might otherwise have difficulty in entering the market. The small companies (which are often well and favorably known as specialists in certain lines) are frequently able to give to an agency the intensive personal attention that is difficult to secure from the great trading company with its mani¬ fold interests. The individual manufacturer’s agent is becoming more and more important in the import business of Japan. Generally he handles only a limited number of allied products and covers the market very thor¬ oughly. For such products as hardware, tools, and sundries he makes an excellent medium of sale. The difficulty with this sort of agent is that he is constantly tempted to take on more lines than he can handle and thereby destroys his useful¬ ness as the manufacturer’s personal rep¬ resentative. Difficulty of Securing Agents. The concentration of Japanese business presents a very real difficulty to the Amer¬ ican firm placing an agency in that coun¬ try. In many lines the number of poten¬ tial dealers is extremely limited, and it often happens that all suitable agents are already tied up. Furthermore, there is a 5 tendency among many of these companies to take on too many lines. Some of the smaller concerns will gladly take on any line that does not require a guaranty of minimum sales. In certain lines there are not enough firms in the field to care for and develop the business properly. Advantages and Disadvantages of Japa¬ nese and Foreign Agents. One of the first problems that must be solved is whether the agency is to be given to a Japanese or to an American or other foreign firm. From the foregoing para¬ graphs it should be apparent that both Japanese and foreign firms have the requi¬ site sales and handling facilities, but that there is one fundamental difference in their organization. This difference is that the Japanese trading company is pri- marily^a buying^and selling agency for its own industrial group, while the foreign company’s sole function is foreign trade. In order to assist in the solution of this problem the outstanding advantages and disadvantages of the two classes of agents are briefly summarized below: The principal advantages of the Japa¬ nese firm are (a) close relation to indus¬ trial concerns in its own group; ( b ) abil¬ ity to grant long-term credits to small con¬ sumers through its own bank; (c) con¬ nections with small producers whereby it acts as their buying and selling agent; (d) ability to carry stocks for immediate delivery. The main objection advanced against the Japanese firm is its tendency to concen¬ trate on sales to concerns within its own group, or to give such companies a price advantage, thus prejudicing the product with other consumers. A further disadvantage is that nearly always these companies handle a number of competing lines and merely quote on 6 all of them when opportunity offers. This means that an American company may lose business to a competitive line handled by its own agents. Another disadvantage is that the large Japanese family organi¬ zations are extremely unwilling to buy from each other. The principal advantages of the foreign firms are (a) independent sales facilities whereby they can cover the market fully and not limit sales to a single financial group; (ft) a highly developed, specialized sales force; (c) concentration of all re¬ sources on sales alone. The most important disadvantage is the tendency of each financial group to pur¬ chase industrial equipment and supplies from its own trading company. In some cases this may be serious; in others it is a neglibile factor, since the industrial con¬ cerns in a financial group invariably have considerable latitude with respect to pur¬ chases and often buy lines which are di¬ rectly competitive with those handled by their associated trading companies. In other words, the engineer and purchasing agents can and do buy from independent importers whenever they consider it to their advantage. However, loyalty to the parent organization will generally prevent such industrial concerns from purchasing products handled by a competing family group. The foreign companies are some¬ times at a disadvantage in financing pur¬ chases by the small retail establishments since they can not undertake to grant ex¬ tended credits to as great an extent as the Japanese financial groups. This may or may not be an important disadvantage, depending entirely upon the kind of pro¬ duction and the class of purchasers. In selecting one of the Japanese finan¬ cial groups as an agent it is essential to take into consideration the industrial con- 7 cerns under its control, since each of these companies specializes to some extent on certain industries. For example, one of these companies owns or controls a num¬ ber of paper mills. This company would be the logical agent for American manu¬ facturers of paper-mill machinery, equip¬ ment, or supplies and it would be unwise to give the agency rights to one of the other Japanese groups. On the other hand, there would be no serious disadvan¬ tage in giving the line to a foreign firm or one of the smaller independent Japa¬ nese importers, provided the financial group concerned did not have a practical monopoly of the industry in question. In appointing regional distributors it is essential to have a definite understanding with respect to Government business. The bulk of the Government purchases are actually made in Tokyo, but in many cases the business will have originated else¬ where and may have been developed by an agent in any outlying district. In such cases it is obviously unfair to let the Tokyo agent reap the benefit of this pre¬ liminary work, but it is generally essen¬ tial that the final negotiations be con¬ ducted by the Tokyo representative. Probably the easiest way to obviate dis¬ putes would be to divide the profits of commissions on such business between the Tokyo and the regional distributor. Generally there are innumerable dis¬ putes in regard to territorial credits, since regional agents almost invariably spend much time and effort in trying to develop business outside their territory. It is gen¬ erally wise to obviate such difficulties by an arrangement whereby the local agent is entitled to commissions on all non-Gov- ernment sales in his territory, regardless of who may have actually consummated the business. 64907—29 - 2 8 10 In general, it may be observed that if the American exporter can secure as his representative one of the larger trading companies, either Japanese or foreign, he need have no hesitancy in granting it the agency for all Japan. This, however, is not always possible. These companies are often already tied up with competing lines, and it is then necessary to seek other channels. The only alternative! are to establish a branch office or to se¬ lect an agent from among the smaller trading companies or manufacturers’ agents. Since the former alternative is rarely practicable except for products for which there is a large and constant de¬ mand, it is usually necessary to enter the market by the latter method. In some cases the smaller companies make suitable agents for the entire country, but gener¬ ally it will be found that division of the country into two or more sales districts will secure a larger distribution and will assure the manufacturer that no impor¬ tant sales areas are being neglected. Principal Sales Districts. Japan proper is divided into two great natural geographic districts with a num¬ ber of subsidiary areas of minor impor¬ tance. The first is the great alluvial plain, known as the Kwanto, in which Tokyo and Yokohama are situated. The second is the Kwansai plain in the south¬ ern part of the main island, which con¬ tains the important cities of Kobe, Osaka, and Kyoto. These tw T o districts are the only ones in which direct foreign trade is of much importance. The smaller cities are accustomed to making their purchases of imported goods through the trading companies located in one of the principal cities enumerated above, either direct or through local branch offices. It is rarely 11 necessary to appoint individual agents in these cities, although it is essential to know that the prospective agent covers them either by branch offices or by travel¬ ing salesmen. An allocation of territory usually fol¬ lows the natural geographic division, an agent in Tokyo being selected for the Kwanto and one in either Kobe or Osaka for the Kwansai district. An equitable distribution would be to grant to the Tokyo agent all territory lying to the east of a line drawn through Nagoya (exclud¬ ing the city of Nagoya and immediate sur¬ rounding territory). This would give the Tokyo or Kwanto agent all of the north¬ ern part of the main island and the northern island of Hokkaido. The Kwan¬ sai agent would be given the remainder of Japan proper, which includes the south¬ ern portion of the main island and the islands of Shikoku and Kyushu. This di¬ vision, however, is of necessity somewhat arbitrary, since the allocation of territory must hinge on the relative importance of the two agents chosen and on their ability to cover the territory adequately. The Kwanto District. Tokyo is easily the outstanding city in Japan from the viewpoint of the American exporter. It is the capital, and all pur¬ chases for the Government departments— an important feature of Japanese trade— are made there. Furthermore, it is the financial center of the country. Nearly all of the great trading firms have their head offices in Tokyo, and every buying and selling agency in the country is rep¬ resented. To a very large extent it is the trade center of the entire country. Yokohama serves as the port for Tokyo, which is only 20 miles distant. It is also the center of the export trade in silk and 12 an important collection and distribution point for the Kwanto. Prior to the earth¬ quake of 1923 many of the foreign-trading companies had their head offices in Yoko¬ hama, but now most of them have moved to Tokyo. Commercially it is a part of the Tokyo district. Hakodate and Muroran are the leading ports of the island of Hokkaido. Their direct imports from the United States are negligible, but they are destined to be increasingly important as the natural re¬ sources of Hokkaido are developed. The Kwansai District. Osaka is the chief industrial center in Japan and is the largest city in the Kwan¬ sai district. As a market for machinery and industrial products it excels all other Japanese cities. It is, however, second¬ ary to Tokyo as an import center. Kot)e is the leading import port of Japan and serves as the port of entry for Osaka, some 20 miles distant. It is also important as an export center of cotton goods and other Osaka goods destined for China and other oriental markets. Kyoto, the ancient capital of Japan and center of artistic and cultural life, is of secondary importance to the importer. It is not a commercial city, but nevertheless consumes a very considerable quantity of imported goods and must be considered in the allocation of sales territory. Nagoya is a prominent industrial and commercial city about 119 miles northeast of Osaka and 235 miles southwest of Tokyo. It is a relatively minor import market, since most of its purchases are made through trading companies in Osaka, Kobe, or Tokyo. Moji and Shimonoseki are twin cities situated on the opposite sides of the Shi¬ monoseki Straits, which separate the 13 island of Kyushu from the main island of Hondo. These two cities are important collection and distribution centers, but engage in very little direct import trade with the United States. Nagasaki, at one time the leading port of Japan, is now relatively insignificant, although it still serves as the port and commercial center for a considerable part of the island of Kyushu. Agents for Japan’s Colonies. Japan’s colonial possessions, namely, Taiwan (Formosa) and Chosen (Korea), need not be considered separately, pro¬ vided the American manufacturer secures as an agent one of the large general trad¬ ing companies with headquarters in Japan proper. However, if he decides to give the agency for Japan proper to one or more smaller companies, he will then have to appoint individual agents for each of these territories. Taiwan, commercially, is to a very great extent subsidiary to Japan proper, and it is quite often possible to allocate the ter¬ ritory to the Kobe representative, pro¬ vided, of course, that he has some direct sales representation on the island, though this does not necessarily mean a branch office. In the cases where it is found necessary to treat the island as a separate sales district the manufacturer must choose from a rather restricted list of small Japanese and Chinese trading com¬ panies. The only cities that he need con¬ sider are Keelung, the principal port, and Taihoku, the largest city and seat of gov¬ ernment. Chosen has a somewhat greater com¬ mercial importance and it is essential to see that the agent who is given the Japa¬ nese Empire as a sales territory is ade¬ quately represented there. In the case of separate treatment an agent must be se- 14 lected from the Japanese and foreign trading firms, of which there are quite a number. It is difficult to lay down any definite rules, since the kind of agent se¬ lected will depend entirely on the product to be sold. In any case, it will not be necessary to split the colony into sales dis¬ tricts. The principal commercial centers are Fusan—the port of entry from Japan, which handles about two-thirds of the foreign trade of Chosen—and Keijo, or Seoul, the capital and largest city. Other cities are Jinsen (Chemulpo), the sea gate to Keijo, and Heijo (Pingyang), where the Pingyang collieries are located. Agents for Kwantung Leased Territory. Japan’s leased territory in Manchuria— consisting of the Kwantung Peninsula and the zone along the line of the South Man¬ churia Railway from Dairen and Antung to Mukden and thence north to Chang¬ chun—is commercially under the direction of Japanese interests and should there¬ fore be taken into consideration in the allocation of Japanese sales districts. Dairen is the gateway to the three eastern Provinces of China which constitute Man¬ churia, a rich and productive area des¬ tined to become of great commercial im¬ portance. All the great Japanese trading companies maintain branches in both Dairen and Mukden; some of them have subsidiary branches in Changchun and Antung. Dairen, from the viewpoint of the American exporter, is almost as much a Japanese city as Tokyo, and if the agent of the American manufacturer or exporter is one of the large Japanese trading com¬ panies, it is as well equipped to look after his interests in the one city as in the other. A good many of the foreign com¬ panies established in Japan have branches in Dairen and Mukden to foster their interests there. 15 There are, however, American firms and others located in north and south Man¬ churia which have relations with each other but no head or auxiliary houses in Japan. On account of their direct con¬ tacts with the Chinese population, which is overwhelmingly predominant, it may be advisable, in some lines especially, that agencies be placed with foreign companies functioning independently in Manchuria, or in connection with their organizations in China, rather than with organizations direct from Japan. These (non-Japanese) companies operating independently in Manchuria, or in conjunction with other large organizations throughout China, very frequently have a network of sub¬ sidiary agencies scattered throughout the country; and because of these numerous and direct contacts with the Chinese popu¬ lation they are often able to give the for¬ eign manufacturer or exporter a wider distribution. Foreign as well as Japanese commercial companies operating in Man¬ churia enjoy the extraterritorial status assured to foreign firms by treaty in other parts of China and are therefore always * under the supervision of the official repre¬ sentatives of the nationalities to which they belong. This is frequently a matter of importance in the event of controversy. Conclusion. In general, it is believed that where the facilities of one of the great Japanese or foreign trading companies can be ob¬ tained, the simplest and most productive course is to allocate the agency for the entire Japanese Empire with it, and wdien it is not possible to operate through one of the large companies, it is probable that a division of the territory into four or five districts (i. e., Kwansai and Kwanto in Japan proper, Taiwan, Chosen, and Kwan- 16 tung leased territory) will secure the best distribution. Table of Distances. Distances in miles from Tokyo to the leading colonial cities are as follows: Fusan (Chosen), 828; Seoul (Chosen), 1,108; Dairen (Manchuria), 1,132; Taihoku (Taiwan), 1,386. Distances (also in miles), between the leading commercial cities of Japan proper are shown in the table below : c3 ‘f-H <3 c3 Z “ OOO^OINONO MXOlOlOlCHr-1 oc CO 1 CNHCOOOJO i O CO •r— » t— i 05 CO 00 CO CO H 1 CO t ^ O t^CO^COCOCO ihN s 1 rH 1 1 6 T3 1 ONHCCOOJ l O SO CO rj rS. o oo n n io o 1 1 o 1 CJHiO iNNCOCCMNO w CIH05 i Cl f- ® lO OC O CO CO 1 CO CO O 00 M 1 1 a3 1 LO CO 1 *0 ’’H CN rH *—H r-H CO 1-H lOC^^NOO-f 03 bO NCI t h h 'C Tf CO N c3 1 £ 1 1 i. rrt 1 CO r>DHOOOONNCOiO P r= r-l i-HHCO>O00O3^)t' iMcococoocoajio o cs 1 pH rC 1 1 o iOO>OC3tOO«OOHN >> IHMMIONOHOOIO I NCOMCONNOOIO o 1 Ph ! c/o a> 3 s c3 oxi o ci ^‘O cj — O *3 . 39*0 : § ^ C3C3 M © o a o v