The Japanese software market is attractive. The market size is at least 4 to 5 times larger than Korea's. Some say it is ten times larger than the Korean software market. According to the government's recent research, the size of the Japanese software market is $69.3 billion (as of 2016)—6.3% of the global market. The average annual growth rate for the past six years has reached 2.7%.
There is something more attractive than size. The Japanese software market has a culture of "paying fair for software contents". Once you enter the market, you can generate stable profits. They tend to pay fair prices for SW products and human resources. In particular, they pay a surprisingly high price for maintenance. Unlike in Korea, there is no free maintenance. The Japanese software market is truly 'attractive' for domestic companies groaning over an abnormal price structure.
In addition, as the economy revives due to Abenomics, investment in information technology (IT) is also booming. The financial sector is showing the most dramatic changes. Unlike in Korea, where the next generation has ended, Japanese companies are just starting their next-generation projects. The Olympic Games to be held in 2020 are also good news.
But the pros end here. As much as it is 'attractive', there are also many cons. First of all, it is almost impossible to penetrate the market. You must prepare your market penetration strategy thoroughly if you are planning to enter the Japanese market. First, to enter the market, the manual must correspond perfectly with the product. If there is a single difference between the manual and the product, it will cause a severe problem. There is a difference between the manual and the function. They are also very strict on quality verification. You will need at least five years of preparation to enter the market, which means you must bear the loss for five years.
Japan's largest IT exhibition (26th Japan IT Week) was held in Tokyo from the 12th to the 15th. ZDNet Korea invited five managers of domestic software companies to participate and discuss on the afternoon of the 23rd. The executives who had been to the Japanese SW exhibition gathered in one place.
The five people attended the conference, including Gyu-Gon Cho, CEO of Fasoo.com, and Kil-Kon Kim, CEO of INNORULES. Seon-Jin Lee, CEO of Nkia, Young-Cheol Cho, CEO of PIOLINK; and Seok-Won Lee, head of the solution business division of Wisenut. The meeting was held on the 17th floor of the Nuurikum Square Business Center in Sangam-dong, Seoul, where the Fasoo.com office is located.
■ What I felt at the exhibition and the reason for entering the Japanese market
Gyu-Gon Cho, CEO of Fasoo.com (hereafter, Gyu-Gon Cho): 'Japan IT Week' is an exhibition where you can see the latest trends in the Japanese IT market at a glance. We participated three years ago, but not this year. After three years, the security field has grown tremendously.
Seok-Won Lee, Managing Director of Wisenut (from now on, Seok-Won Lee): We set up a booth in the Korea Pavilion prepared by the Korea Software Industry Association (Hansohyup). We entered the Japanese market in 2008. We have an agency in Japan now, and it seems we have secured growth momentum.
There were not many potential customers during the exhibition. But there still were some achievements. A famous Japanese SI company showed interest in our company, so we met. Another achievement is that we could gain knowledge of the areas we are currently working on, such as chatbots.
Another thing I noticed is big data. Big data hasn't yet developed much in the Japanese market. Not much has changed from three years ago.
Kil-Kon Kim, CEO of INNORULES (hereafter, Kil-Kon Kim): We have been tapping the Japanese market for five years now. It has been two years since we started as a branch and established a corporation. In Japan, the image of Korean software is not very good. So, I participated in the name of the Japanese corporation. After discussing the introduction of the solution for the past three years with Japan's largest insurance company, the contract was signed at the end of last year. That's why I went to the exhibition this time. Our solution was introduced to the Japanese press, so we entered the Japanese market relatively easily. 70~80 potential Japanese customers also came to this exhibition.
Young-Chul Cho, CEO of PIOLINK (hereafter, Young-Chul Cho): We are in the network equipment and security business. Japan has been in business since 2005. At this exhibition, I saw that Japanese people became very bright. In the past, they were depressed because of the Fukushima nuclear power plant accident. There was also a lot of anticipation and publicity for the 2020 Olympics. The economy is a sentiment of expectation. Abenomics seems to have succeeded to some extent. Two or three years ago, I was skeptical of Japan's economic growth, but this year, I could feel that the economy was brisk.
Until last year, My Number was a big issue. A major insolvency accident related to this business last year seems to have had an impact. But overall, I felt that the security sector is continuously expanding.
Seon-Jin Lee, CEO of Nkia (hereinafter referred to as Seon-Jin Lee): Originally, we were skeptical about the exhibition. Because we thought it was not worth the investment. But this time, I changed my mind. I felt that it was time for us to expand our market. We are also planning to participate in the 'Interops' exhibition in the near future.
■ Problems with Korean exhibitions
As we talked about the Japanese exhibition, the participants naturally compared it with the Korean exhibition. Although the population is only half of Japan, there are a number of exhibitions, and many pointed out that it is not the B2B exhibition that companies want.
Gyu-Gon Cho: Among the exhibitions held in Japan, this exhibition immediately comes to mind. Because this exhibition is one of the representative IT-related exhibitions held in Japan; however, Korea is not like that. There are too many similar exhibitions. The way Japanese exhibition is managed is also something that we should imitate. 'IT Japan Week' exhibited everything related to IT. It is convenient for exhibitors and visitors, unlike in Korea, where there are too many exhibitions. When a foreigner asks, "Which exhibition in Korea should I participate in?" there is no exhibition that comes to my mind right away.
Young-Cheol Cho: There are events like the 'World IT Show' in Korea. But there are too many things that are not related to SW. It is also not a B2B event.
Seon-Jin Lee: That's right. Korean exhibitions usually are not worth the investment. For B2B events, many corporate customers should come, but this is not the case. Many corporate customers come to the Japanese exhibition.
Seok-Won Lee: Japan is not interested in other countries such as Southeast Asia because its market is large enough. It will be exaggerated to say that the Japanese market is ten times bigger than ours, but I believe their market is at least five times bigger than the Korean market. When we first ran the search queries in Japan, I was surprised by their population. It was twice more than that of large domestic companies. Considering Korea's population, we have too many exhibitions.
Kil-Kon Kim: Visitors can check and decide what they want to see in advance with Japanese exhibitions. They don't just walk around and browse. Related information continues to flow through the VIP invitation.
You can see how much thought and effort the exhibition organizer put into planning the exhibition.
Seok-Won Lee: Another impressive thing about this exhibition is the reservation for next year. They made a giant billboard and put a sticker on the reservation status for next year. By the last day of the exhibition, these stickers were almost full. They told me to make a reservation as soon as possible because it was filled up to a certain percentage with daily broadcasts.
Gyu-Gon Cho: Large American exhibitions give participation invitations to companies that have participated in that exhibition for a long time. So, if we are to participate in the exhibition, we can prepare for it a year before it is held. This is not possible with Korean exhibitions. The preparation time we get for Korean exhibitions is too short.
■ Points to note when entering the Japanese market
The story is about what domestic companies should be aware of to enter the Japanese market and how the Japanese software market differs from ours.
Kil-Kon Kim: I was initially not interested in the Japanese market. Because I've heard many stories about how difficult it is, INNORULES specializes in a rule-based BRMS. When we became the leader in the domestic BRMS market, a Japanese company contacted us. At that time, I was skeptical, so I turned down the offer. But then they contacted us again. They said they would handle everything from their side if I just gave them the materials they needed to advance into Japan. There was no reason not to.
Before entering the market, our Japanese partner researched our products' current state and interviewed our clients about the products.
This led to the introduction of our products in Japanese IT magazines. After the article was published, interest in our products grew in Japan.
So we participated in a seminar in Japan, and a financial company that attended this seminar made direct contact with us. This is how we got to secure a large Japanese financial company as a customer. When we started the business in Japan, we were surprised by how customers treated vendors. They treated us very politely and respectfully. Some might say, 'Why is that so surprising?' but it is usually not like that in Korea. The cost of developing the Japanese version of our product was about 400 million won. When we told the customer we could not develop the Japanese version because it is too risky, the customer paid this cost.
And I was also surprised by their strict quality verification standards. When the customer expressed their intention to purchase our product, I thought the sale would proceed quickly. But it didn't. They asked us to do a 'PoC (Proof of Concept)' close to a pilot run. I did not know it would take two years. It is unimaginable in Korea to do PoC for two years. What's even more surprising is that the customer paid this cost. This never happens in Korea.
Jo Young-Cheol: That's right. It seems common in Japan, which is why doing business in Japan is attractive. We sell hardware through large Japanese companies that also purchase and use test equipment. The same goes for maintenance. In Korea, customers expect us to provide maintenance services free of charge. Japan is not like that.
Kil-Kon Kim: Yes. In Japan, maintenance service is never available for free. It also happened during PoC. When I said that we would put our employees in Japan for free for about a month to speed up the project, he said, "Absolutely not." Then they took a separate budget, and only then did they allow us to put in our developer. During the PoC, I went to and from Japan for six months, and the Japanese customer paid all the hotel expenses here. I doubt the same thing would happen in Korea.
Gyu-gon Cho: What others have said just now is not a culture unique to Japan. It is the same in the US. The way customers treat vendors and products is very different from Korea. If there's a PoC and a fair price is given for PoC.
■ Japan's own software companies appear
Kil-Kon Kim: Oddly enough, despite Japan's software company-friendly environment, there are few local solution companies. Most of them are from abroad. However, there are signs of a change in this atmosphere. I heard that the Japanese branch of a global software company is preparing to withdraw because a Japanese company has developed new software that can replace the global company's product.
Gyu-Gon Cho: We entered the Japanese market before the US. But we faced some went through trials and errors. After we entered the market, sales did not increase for quite a period. I wondered why. We aimed to create a new market with our product, but then we discovered that it is almost impossible to create a new market in Japan. The market accepts things already made and proved, but Japanese consumers don't like trying new products. So, we decided to revise our strategy to enter the Japanese market, create a trend in the US first, and then advance into Japan based on this.
Seok-Won Lee: I went to school in Japan for ten years. I thought I knew Japan. In 2008, several Korean software companies jointly opened an office in Japan, and I was in charge of it started. In Japan, they would pay for even the most minor things. In other words, the cost burden is high. There used to be five large SI companies that led the market, but now it has been reduced to three. A product must have a perfect UI to be successful in the Japanese market. Only the products that run without any modification after installation are acceptable in Japan.
Kil-Kon Kim: Unlike Korea, Japan does not integrate systems when companies merge. It is a unique system integration (SI) culture. Japanese have a strong tendency not to cause trouble to others, and this seems to be reflected.
In Japan, when they hear the word "customizing", they do not consider it at all. Because of this, you cannot sell products in the form of an engine but as a packed product. As a result, it is challenging to sell several lineups. Japanese people tend not to try new things. They would instead prefer upgrading the existing one. Many companies in Japan use the same SW for 30 to 40 years. Which means they don't try too many new things. It is because they feel they should be held responsible if there is a problem when they try something new.
Leave the legacy (old system) and let it do what it does. They will not try to integrate the system. Unlike Korea, no company introduces the system on a large scale like the next generation. No large-scale business exists unless large SIs creates projects worth hundreds of billions of dollars. But hundreds of billions of dollars worth of the project is not easy to make. Even though I lived in Japan, it took me quite a while to find out about this.
Young-Cheol Cho: The reason why our company entered Japan is similar to INNORULES'. I was doing business in Korea, and the Japanese came to me first. To this day, we are still running a retail business. Unlike in the past, there are many venture companies in Japan now. Japan is currently making its software products.
Seok-Won Lee: That's right. With the economy revitalizing with Abenomics, IT investment is reviving. The number of IT companies is naturally increasing. In Japan, venture companies are now emerging. Many companies used American software in the past, but now they seem to be using Japanese products.
Kil-Kon Kim: Unlike Korea, Japan does not integrate systems when companies merge. It is a unique system integration (SI) culture. I think this also reflects the Japanese' strong tendency not to cause trouble to others.
■ The Japanese SW market that pays its price… Thorough quality verification. Use for 20 to 30 years after adopting a new system.
Kil-Kon Kim: Another thing that surprised me in the Japanese market is the period of large-scale projects. The review period alone took 4-5 years. I've only been verifying for two years. Only after this the next generation project starts. The next generation period is ten years. The budget is also large. The next-generation system we are making is 2 trillion won. The project scale of Japan is generally larger than that of Korea. The financial project we are working on transforms the IBM environment into an open one. This is the first case of the Next Generation project in the Japanese financial market. Other financial institutions are watching closely. In Korea, the next generation of financial institutions has rotated twice. It's the next-next generation for Korea. But Japan has never done it. There is no project manager (PM) to lead the next generation. It is a big problem.
Gyu-Gon Cho: Venture companies have many opportunities if you go from the IBM environment to an open environment. In the IBM environment, ventures cannot afford to enter. Moving to an open system can also lead to new experiences in the security field. Many new Japanese security companies were also seen at this exhibition.
Young-Cheol Cho: I see Japan moving to an open environment as a good sign because it opened the door of opportunity for many companies. However, you need to know which field is right for you and enter it.
Seon-Jin Lee: I realize that the Japanese market is slow and thorough. We sold in Vietnam first, but when we saw the Japanese market, the price was several times higher than in Vietnam, so we entered the Japanese market. Our Japanese partner has tested our product for quite some time and is still being tested.
Seok-Won Lee: That's Japanese culture. I was in Japan when the earthquake happened. On Friday, water was cut off on Saturdays and Sundays, and I didn't even go to the subway. But on Monday, employees living in areas near the earthquake rode their bicycles to work at 4 am. Even though they couldn't work due to infrastructure paralysis, they called to see if their customers were okay. Japanese buy products thinking they should know the counterpart at least for 20 to 30 years. And this is why the review period is long and difficult. Instead, it is difficult for new companies to break through.
Young-Cheol Cho: We have different maintenance policies for Japan and Korea. In Japan, the maintenance period is ten years, but in Korea, it is shorter. In the Japanese market, you pay for maintenance even if a problem occurs during the 10-year warranty period. There is nothing to lose on our side. Unlike in Korea, maintenance accounts for nearly half of sales in Japan.
Seok-Won Lee: We have 80 local government institutions in Japan as our customers. And many of them have paid the five years maintenance cost in advance. They say they won't change the system for at least five years. They said that if they are to upgrade the product, they will pay an upgrade fee separately. It's great that the government agencies give fair prices for products. This is something that the Korean government can learn from the Japanese government.
Gyu-Gon Cho: I think it is a good idea for our government to purchase the products that have already been introduced in advanced markets such as Japan.
Kil-Kon Kim: I was also surprised when we signed a solution purchase contract last year. After the evaluation, they paid us immediately. Even though the solution has not operated, we signed the maintenance contract immediately. Unlike Korean customers, who pay maintenance costs in installments, they pay the maintenance costs all at once in the first month. The way they pay for software in Japan was genuinely shocking.
Seok-Won Lee: In Japan, they pay 20% of the purchased product license price and 20% of the service cost at once.
Seon-Jin Lee: There are many things to say regarding the problem of maintenance contracts that are customary in Korea. One example is the unfair maintenance practice with large companies. Affiliates of large corporations intervene and take the share of the company that initially provided maintenance. The contract amount does not increase, but taking a part of it will only decrease the initial maintenance contractor. I hope that the new government will resolve these issues.
Kil-Kon Kim: Japanese companies create an environment where their counterparts are not harmed. It seems to come from a culture that does not harm others. Japanese companies treat their counterparts as partners.
Gyu-Gon Cho: The United States also has a win-win corporate culture. Large enterprises grow with the small and medium-sized enterprises they do business with. Treat each other with respect to grow together. There is no such corporate culture in Korea.
Kil-Kon Kim: It is still difficult to experience a culture of mutual growth and coexistence in Korea. The environment for these values seems to be in place in Japan and other developed countries.
■ Points to note when entering the Japanese market
Seok-Won Lee: The Japanese market is very different from ours. First, you have to change the concept. Technology is equally important in Korea and Japan. But the concept should be different. If it sells well in Korea, there's a possibility that it might not sell well in Japan. Let's take the Girls' Generation as an example. In Korea, they emphasize sexiness, but they changed their concept to a cutesy girl group in Japan.
Also, it is an excellent way to compete with products that are unique to Japanese culture and that only work in Japan. Let's take our company as an example. Our product that Japanese customers purchase is 'search'. However, they do not usually use them. They use it when an earthquake occurs. Even though they only use them when there is an earthquake, they buy the product. It is necessary to make good use of these unique characteristics of Japan. To do this, you need to talk and communicate closely with your Japanese partner.
Seon-Jin Lee: It is crucial to let Japanese customers know what works and what doesn't. The Korean method of making things to meet customers' requests does not work in the Japanese market. This is the difference between the markets.
Gyu-gon Cho: It is necessary to prepare thoroughly from the product planning stage. In Korea, only a rough design is made, and changes are made according to the customer. This shouldn't be the case. Product planning needs to be done more carefully.
Young-Cheol Cho: We have to keep doing business in Japan. Strategic differentiation is obvious. I think it should be at least five years. Even if there is no result for five years, you must continue to invest. Even if you lose for five years, you should do it with an investment mindset. It doesn't matter how big or small it is. It should be more than five years with just one product.
Kim Gil-gon: In Japan, a product review process is very strict and takes a long time. Perhaps, this one experience we had with our partner can give you some idea of how serious the Japanese are about quality control—when we sold supplied a solution to Hitachi, three of Hitachi's employees stayed in our company for one year. The source code is important, but the manuals are also important. In Japan, the quality control process includes checking for typos in the manuals. That's why the manual is so important. The manual should be inspected at the Japanese standard. Otherwise, it will not be accepted in the market. In Korea, if there is an error, all we have to do is send a notification and release the patch file. However, in Japan, this can never be the case. All patches must be reported according to the specified procedures before release.
In Japan, a product goes through a lengthy preliminary review before purchasing. It may take a long time for results to occur. Therefore, product quality plays a vital role in the success or failure of a business.
Gyu-gon Cho: That's right. The product has to be in perfect correspondence with the manual. They will not accept if the product has a function not mentioned in the manual. Even the most minor feature must be mentioned in the manual.
Young-Chul Cho: Strategies should be different depending on the product and size. It is crucial to find a partner for each market segment. Finding the right partner and customer for your solution is the key to success.
■ The support measures needed at the government level are
Kil-Kon Kim: I would like the government to hold several meetings for companies wishing to advance overseas can build networks with each other.
Seon-Jin Lee: I hope that there are government-supported institutions in each country so that comprehensive and systematic support can be provided. Organizations with jurisdiction over IT support organizations located abroad are dispersed, and I think they should be integrated into one by the [Ministry of Science, ICT and Future Planning].
Gyu-gon Cho: In Japan, getting an office in the early stages of a business is difficult, so I hope the government will help. Of course, I think there could be some controversy about this. Another thing, I hope that government-funded projects consider the diversity of the market. Current government-funded projects consistently implement the same policy in all countries without considering the characteristics of each country and market. For example, Korean brands do not appeal to Japanese customers. This is why many companies do not prefer participating in exhibitions with the Korean Pavilion. On the other hand, in Southeast Asia, Korean brands work. These preferences must be taken into account.
Seok-Won Lee: I agree. It would be more helpful if the government supported companies directly, even with a small amount, than to set up a Korean pavilion. And the reason it is difficult to get an office in Japan because you need a guarantor and a Japanese account to get an office. How do I create an account when I don't have a business record? Finding a guarantor is also tricky. This is why there are broker companies that help you open an office, but they often do scams.
Seon-Jin Lee: In the domestic SW market, like the Japanese market, the perception that SW should be purchased at a reasonable price is low. For domestic software companies to enter overseas markets, they must secure stable cash flow in Korea. However, the domestic software market has many disadvantages in providing a stable cash cow.
Seok-Won Lee: Seok-Won Lee: We also need accurate statistics. I got a call saying they would give out statistics, and they finished the survey in 10 minutes. This way, accurate data is difficult to obtain and cannot be trusted.
Seok-Won Lee: We also need accurate statistics. I got a call saying they would give out statistics, and they finished the survey in 10 minutes. This way, accurate data is difficult to obtain and cannot be trusted.
Gyu-gon Cho: The problem is that the data is not updated to the latest. Since market research is outsourced for a small amount of money, it is often done superficially. Spend more money on stats and do it right. How the government perceives SW is also a problem. Is Kakao a SW company? In Japan, when you say 'IT,' it often means software, whereas, in Korea, it often means telecommunication and hardware. If you go to a Gartner's event, there is no hardware; everything is software.
Seok-Won Lee: Certain certifications are often required when entering the Japanese market. However, it is difficult in Korea to find data on the relevant certificate and patent, and there is no support. It will help companies enter the Japanese SW market if related supports exist.