The Japanese Housing and Construction Market; Why Bother?

Large, high value, opportunities for niche products.

You may have considered the Japanese market, but were told by someone that it’s difficult, distant, costly and not worth your while. Some of this is true, but here’s what I’ve learned after selling imported housing and construction materials into Japan for 25 years.

Yes, the market is shrinking, as population shrinks in Japan, but it is still large and for many players both domestic and foreign, very stable and profitable with good growth prospects. Consider some statistics.

According to the EU Gateway To Japan project,

https://www.eu-gateway.eu/sites/default/files/collections/document/file/market-opportunity-construction-building-japan-2019.pdf.pdf

the total value of the Japanese construction market is over 400 Billion Euro, or approximately USD$500 B.

• There are a few very dominant extremely large general contractors at the top of this pyramid, but over 690,000 small contractors in operation.

• The share of residential construction is estimated at 114 Billion euro and commercial construction at 83 billion euro.

• While new housing starts are estimated to fall from current levels of approximately 900,000 per year to just over 700,000 by 2030, the houses being built will need to be much more energy efficient and durable.

• While the share of new housing is dropping, the pace and value of home renovations (almost always done by contractors, not DIY) is rising.

But what do these huge numbers have to do with your company?

"Certainly Japan is not for everyone.Successful foreign companies in Japan tend to be of a certain size. willing to take a longer term view of success, and be responsive to product and service quality levels, localization and regulatory issues."

In my experience, most successful non-Japanese companies in the building and construction space in Japan offer products that share one or more of the following characteristics.

• Uniquely designed products manufactured using methods or machinery that cannot be replicated in Japan. (niche high design fixtures, some roofing materials, flooring, decorative bricks)

• Their country of origin manufacturers those products on a scale that drives costs well below that of domestic Japanese substitutes (structural lumber, log homes).

• They are niche products made from unique materials that Japanese manufacturers do not find profitable to emulate and which often appeal to consumers looking for quality and features over price. (environmentally friendly paints and coatings, natural insulation and floor coverings).

Certainly Japan is not for everyone. Successful foreign companies in Japan tend to be of a certain size and are often already selling into other export markets. Many of them take a longer term view of success, and understand market needs including the value of investing in product and service quality levels, localization and regulatory issues. I will go into all of these points in more detail in future blogs, but if you are at the point where you are considering the Japanese market, ask yourself the following questions.

Questions to Consider

• Is my product and IP truly unique, or can it be easily copied by an efficient manufacturer in Japan?

• Is my product readily adaptable to different styles of design and construction or is it uniquely suited to features of construction in my home market?

• Do I know how to find out if there is an existing market for similar products in Japan or a potential to open a completely new market?

Depending on your answers to these questions it may be very worthwhile exploring the Japanese market. I have personal experience of foreign companies of varying sizes from multi billion to tens of millions of dollars in sales succeed in Japan. Their products included…

Lumber including plywood, laminated wood products (CLT)

Spray foam insulation

Floor coverings including linoleum, vinyl and carpet sheets and tiles

Wood flooring

Wood and aluminum clad windows

Interior and exterior doors

Log homes

ERV (Energy Recovery Ventilation) systems

Fiberglass insulation

Paint and coatings technology

Building systems controls

Kitchen cabinetry

Hardware

Doing Things Better in Japan

Many small and mid sized foreign companies in this market segment in Japan experience small but very profitable sales that take time to materialize. Some find it difficult to go beyond a 'niche' market and remain satisfied with sales of less than $10M but EBITA's of 15-20%. For those who expect more from the 3rd largest market in the world, and find themselves plateauing at this level of sales, new ways of approaching the problem may have to be found, including local staffing changes, new product introductions, revised pricing and most importantly, a change in distribution channels and/or partners.

If you are already operating in Japan but at nowhere near the level you had anticipated when starting out, some of the above issues may need to be addressed. Unless there is something fundamentally wrong with your go-to-market approach, in my experience there are almost always cost-effective ways to modify existing sales and distribution systems in Japan to increase revenue and/or profitability by reducing costs and getting closer to end users. These will be addressed in future blogs or you can email me directly at edegroot@degroottrade.com